In 2023, startups are hitting the wall. Many are down to their last few dollars. But how about a loan?
Get the blog before anyone else…subscribe!
Going into debt is a mistake I am seeing more and more founders make.
Debt comes in a variety of forms. Founders use bank loans, SBA loans, and even credit cards to fund their businesses.
But you should not go into debt for an early stage startup.
Avoid Debt Like the Plague
Most early stage startups fail. Best case scenario, about 70% of my seed stage bets are going to 0.
For me, that’s fine. I can afford to lose the money. But for a founder, an indebted startup going to 0 can be disastrous.
Most business loans require a personal guarantee. That means that if you borrow money and can’t pay, the lender can (and will) come after you personally.
This means you could lose your bank accounts, 401k, even your house. No startup is worth that.
Losing your business is hard. You’ll be emotionally drained and forced to look for a job.
You don’t want to add personal bankruptcy to those problems.
What About Venture Debt?
Venture debt is different.
Venture debt can work for some later stage companies with large and predictable revenues. But it’s not a viable path for an early stage startup.
What’s more, venture debt generally doesn’t involve a personal guarantee. If the company blows up, you can walk away.
But Early Stage Startups Raise Convertible Debt!
Perfectly true, although SAFE’s are more popular these days. But convertible debt works very differently from most business and credit card debt.
Convertible debt operates more like equity.
You don’t pay the interest in cash. Instead, you just give the investor extra shares.
And if the company doesn’t make it, the founder can walk away. There’s no personal guarantee.
Wrap-Up
I don’t want to see you lose your business. But we have to admit, it’s possible.
If that happens, you want to be free to walk away and start over. Clean slate.
What you don’t want is to compound a bad situation with losing your house and all your money.
Be very careful with debt. And always work with an attorney who knows tech startups inside and out.
Win or lose, you must live to fight another day!
Do you see startups going into debt in this tough market?
Leave a comment and let me know!
More on tech:
Sequoia Dumps Citizen: Ruthless, or Reasonable?
I See Negative Gross Margin Businesses
Get the blog before anyone else…subscribe!
If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog!
Save Money on Stuff I Use:
This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.
More on Fundrise in this post.
If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!
I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!
I wrote a detailed review of Misfits here.
Use this link to sign up and you’ll save $15 on your first order. e
Tremendous 
2 thoughts on “Don’t Go Into Debt to Fund Your Startup”