I once met a startup that was $700,000 in debt. Never do this.

Angels and VC’s invest money to buy shares in a company. If the company runs out of cash, you don’t have to pay us back.

But there is another source of funding for startups: debt.

First off, let me tell you in the strongest possible terms: before you sign anything, get legal advice. Going cheap here could cost you your butt.

Now, let’s look at the various types of debt you commonly see at startups. Here are 3 types I see over and over:

1) Venture debt. These loans are usually given by banks that specialize in working with startups, such as SVB.

The loan usually comes along with a round of equity funding from venture capitalists.

In most cases, venture debt does not include a personal guarantee. However, you should absolutely have your lawyer look over any paperwork to be certain that there is no personal liability.

Venture debt was traditionally used by huge, pre-IPO startups. They have predictable financial models and can be pretty sure of their ability to pay back the loan.

But increasingly, earlier stage startups are layering on venture debt. This is very risky.

2) On Deck Loans. One of the biggest providers of general small business loans is a company called On Deck.

These loans are very different from venture debt. They involve a personal guarantee.

That means that if the business fails, On Deck can pursue your personal assets.

Take on debt like this, and you put everything you have at risk.

3) Stripe Loans. These are based on the revenue from your business. They usually don’t include a personal guarantee, but you absolutely must verify this before taking on any loan.

Stripe may offer you one of these loans without you asking. But think long and hard before you take it.

It’s very tough to make a business work. If you have to pay out a ton of your revenue to Stripe, it just got a lot harder.

I was once an investor in a startup that wound up paying a huge percentage of its revenue to Stripe because of a loan. The startup failed.

Don’t let this be you.

My View on Debt for Startups

No startup should ever take on one single penny of debt. Not for any reason.

Building a billion dollar company is next to impossible anyway. Do you want to make it harder by layering on debt?

No, you don’t.

I am a huge proponent of the free market. I’m glad banks like SVB can offer venture debt and business loan providers like On Deck and Stripe can offer their loans.

It’s a free country.

But that doesn’t mean you need to take it.

Wrap-Up

If you study the all time greats in business, they have one thing in common: they avoid debt.

Charlie Munger. Hetty Green, the richest woman on the planet around 1900. You name it.

The same is true of little old Francis. I have never taken on debt for a business. The only personal debt I ever had was a $1600 school loan, which I paid off in 2006.

Debt raises your risk. Life is risky enough.

Whether as a business or personally, you can prosper without it. And when the tough times come, you’ll survive.

The folks who are $700,000 in debt? They won’t.

---

There will be no blog on Monday for President’s Day. See you on Tuesday!

More on tech:

What VC’s Won’t Tell You About Europe
Meet My Latest Investment: Querio

I’m About to Close the World’s Tiniest Venture Fund

Save Money on Stuff I Use:

Fundrise

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!

Misfits Market

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.