

Ask YC: Debt Financing for startups e.g.: Facebook, Blekko? - prakash

Why do startups use debt financing, why is it so popualar, other than the fact that startups don't need to part with equity?<p>and in the couple of cases I have seen it, it's mostly for hardware/ infrastructure related stuff? why is that?<p>-- Blekko: http://www.techcrunch.com/2008/05/14/stealth-search-engine-blekko-gets-money-from-marc-andreessen-softtech/<p>-- Facebook: http://www.businessweek.com/technology/content/may2008/tc2008059_855064.htm
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bigtoga
If you want a real answer, read 2-4 books. If you want a pithy, poorly
explained 2-4 sentence overview, then here's my attempt: debt financing is
attractive to startups since they can often get favorable terms on the debt
(one year payment and/or interest free). Investors often like convertible debt
since it is less risky than a straight investment; i.e. debt is paid before
any profits are paid. Investors also will generally have the option to convert
the debt to equity later on at today's valuation. Why is it often done for
hardware? Easy: collateral.

