There’s been one big change for the worse in the startup world in the last five years, according to Ron Fleming, a partner at Pillsbury Winthrop Shaw Pittman.
The market is now “loaded with bad information” from “startup advisors,” says Fleming.
In particular, there’s one piece of terrible advice from these advisors that is infiltrating the startup scene — the rise of bridge debt for early stage startups.
Fleming is a lawyer who has worked with tech companies since 1993. He’s helped incorporate tons of companies in New York and advises them when they’re raising rounds of funding.
I’m doing a panel with Fleming at Business Insider’s Startup conference on everything you need to know about raising funding. (Tickets available here!) As part of the prep for the panel I asked him about the biggest change he’s seeing in the startup world.
Without a second’s hesitation he jumped into talking about bad advisors and and bridge debt.
When you’re just starting a company, your equity is all you have. Understandably, you don’t want to give it away. As a result, advisors say, take money as debt. This way you can protect your equity.
The problem is that it makes no sense for a startup to take on debt. By definition, you’re insolvent. You have no business taking on debt.
Plus, you don’t just get debt. You take on terms that are favourable to the investor. You get debt, they get to come into your next round of funding at a capped valuation. That means you either end up owing them money if you can’t raise another round, or if you can raise another round then that person gets in at a serious discount.
Fleming says startups are better off just doing a straight up pure equity raise.
UPDATE: Just to be clear, Fleming is talking about capped debt where the startup is guaranteeing a low single digit valuation. This has become ubiquitous with debt deals, and he thinks it’s bad for startups.
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