

Ask HN: two questions about seed loans - Atlantean_IT

We're currently looking to take a seed loan in the amount of 10-15k, probably from someone we know, to bring us through the next 6 months of alpha development.<p>First question: For this kind of (high-risk, IT start-up) loan, what's a reasonable interest rate? Any considerations on how this is typically set up? What should we take into account in negotiating it?<p>Second question: How much of a financial cushion would you recommend taking? My most optimistic financial projections say that we will probably make it with 8k, but of course we want at least a little safety net for unanticipated expenses and delays. What kind of range do you typically see for start-ups' in terms of safety capital?
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sagacity
> How much of a financial cushion would you recommend taking?

I'd say as much as you can get, and then some. :)

In all probability, your projects will start turning out to be inaccurate as
you progress. If and when that happens (I do hope it doesn't, but as they say,
sh*t happens), having a good cushion will do a lot to your peace of mind and
allow you to maintain focus.

One point of caution though: If you go this route, do not forget to maintain a
strict financial discipline.

In the worst case scenario (which may actually be good), you will end up
paying interest on the unspent money but the benefits of having it around
should far out-weigh this. (You could also structure this so that you don't
pay interest on unspent amount but that's a different topic.)

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sagacity
Typo realised after 3 days !!!! :) Meant: In all probability, your projections
will start......

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chris_dcosta
This is a loan, not an investment - the difference should be obvious, but to
spell it out: they'll want their money back whether you make it or not.

I'm going to make an assumption that they are looking for equity too, but I
could be wrong.

Putting it together: they loan you money which you have to pay back with
interest, and you give them a %age of whatever you build just as a topping.

You could go to the bank and get about the same and not have to give away
anything. Is this really what you want?

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Atlantean_IT
To be clear, we're talking about an unsecured loan against the corporation.
That is, it is clear from the beginning that if the corporation goes bankrupt,
they will not be seeing their money again.

Of course, a bank would not be interested in this; only an investor with a
willingness to take a risk and some confidence in the endeavor. That is who we
are talking about. I'm asking about what %annual interest is typical for an
unsecured loan from such a seed investor.

We're not talking about stock because we don't have current plans to sell or
go public, so stock wouldn't make sense from an investment perspective. I'm
sure there have been other start ups who have been in a similar place; I'm
wondering how they set it up.

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JamesPeterson
This is not an ideal fundraising instrument for a startup, because it is
likely the fair rate of interest will be higher than the loan amount itself
(ie >100%).

For a pre-alpha startup, think equity. Any investor will want their chance at
a return which reflects the opportunity costs and risks of their investment.

Edit: stock makes plenty of sense for investment. The purchase of equity is
the same as buying a stake of future cash flows, whether this is as growth or
dividends. Note that responsible directorship applies.

