

Bootstrapping Startup: Raise Debt From Your Employees - eladgil
http://blog.eladgil.com/2010/07/bootstrapping-raise-debt-from-your.html

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pdebruic
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.

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eladgil
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.

