Do Startups Often Float Bonds?

On February 16, 2013 by Alexander
It’s not common. Businesses that can raise debt, based on the strength of their operations and balance sheets, probably should do that instead of raising venture capital. Debt is “cheaper” in that you don’t have to give up equity. So if debt is an option, there may be little reason to raise venture capital.That said, some startups with little or no real operations or assets do raise debt. Other venture capital-backed startups later raise debt after they’ve stablized. The debt financing prevents further dilution of stock holders.

There are a couple of bond/debt-financing options I’ve seen.

1. Venture Debt. Firms such as TriplePoint Capital offer debt financing to startups, usually to buy servers, chairs and other capital assets (that they could later foreclose on if necessary). YouTube and Facebook both did deals with TriplePoint, but these companies were already well established when they executed a less-expensive option for growth capital.

2. Founder-financing. A well-to-do founder, presumably wealthy from a previously successful startup, could loan his next startup money and set the terms for the loan himself. The startup (his startup) would then pay him a coupon on the bond and eventually pay him back the principle. Meanwhile, he could use the money to keep from having to raise venture capital and diluting his own ownership stake. This is pretty complicated and you’d need some good lawyers to figure out the details.

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