Bootstrapping Startup: Raise Debt From Your Employees

http://blog.eladgil.com/2010/07/bootstrapping-raise-debt-from-your.html

by eladgil • 16 years ago

4 2 16 years ago

blog.eladgil.com

pdebruic• 16 years ago

While I agree that not paying employees (consultants, etc. ) with money extends the runway while running on the founders captial I have a couple problems with this tactic.

1. Like relying on an unpaid interns you limit your potential employee pool to the group of people who can either afford to work for free (no cash right now), have no better option than to work for free, or who have to work a second job to pay their bills.

2. Most of those people won't understand the probabilities of success and payout amounts to founders, employees, and investors under the variety of plausible financing and exit scenarios.

3. You didn't mention personal guarantees on the company's debts to the employees. How do you collateralize your obligations to the people? Are the employees retained under this plan sophisticated enough to understand the credit risk they're taking? Are there covenants or debt coverage ratios you're committed to maintain?

4. What happens when you fire someone (or they quit) before the fundraising?

Why not just make a loan to the company yourself and give them cash? 2nd mortgage or from friends and family... Seems cleaner.

eladgil• 16 years ago

Very good, thoughtful comments.

1. Agreed. There are only certain types of people who can do this. Most of the people who did this with us already had a full time job and were working with us weekends/nights only. So this was not an issue.

2. I think this is true with regular full time employees over the life of the company too. So don't think that applies just here. It is important as the company founder to educate people in general about what they are signing up for, future dilution etc. etc.

3. I think this is making it more complex then it has to be. There is not a large number of employees or other large debts associated with a <5 person internet startup.

4. They get paid whatever they are owed when the company raises money.

Bootstrapping Startup: Raise Debt From Your Employees

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