My start-up is worth millions: why am I down?
There’s nothing better than being worth millions on paper and not being able to afford the crappy car.
If this sounds familiar to you, it’s because many of us have an article of extraordinary value that is worth absolutely nothing outside of our conference room.
Investors say I’m worth millions. My credit card company doesn’t agree.
It’s not uncommon (at all!) For founders to have all of their net worth tied up in their business without a real dollar to prove it.
This is because the value we have in our stock has no liquidity – it is a promise of future payment – without any compensation. This dichotomy is infuriating for any startup founder, let alone almost every business owner since the dawn of time.
Why doesn’t a bank think I’m worth something?
When a lender looks at us, they think of one thing: “What is my recourse when this person stops paying me?” They’re looking for old-fashioned guarantees – they want dollars and W-2s.
Their worldview is based on a very long history of fundraising with people with regular jobs and assets that they can easily take over. Our startups don’t easily fit into these categories, no matter what the rest of the world might think they’re doing.
Is there a way to turn that paper money into, you know, real money?
There are, but it’s expensive.
Depending on the nature and ownership structure of our business, we may occasionally find “liquidity” among specialist lenders who will use our business profits as collateral.
These range from “merchant cash advance” companies (on the more expensive side) to commercial banks that work with startups. To be honest, it’s often very difficult to come up with useful terms with these, but they do exist.
Alternatively, there are private equity firms that will look to companies with as little as $ 5 million in revenue to buy a percentage of the company (founder’s liquidity) while still allowing us to run them. This is often the most likely way for founders to get cash without being able to fully sell the business.
I hear the founders ‘take money off the table’ – what is it?
It is true that in very rare circumstances highly competitive fundraising operations sometimes create the opportunity for founders to create some liquidity (“take money off the table”) during the fundraising cycle.
But it’s super rare, and if that was an option, it would be pretty obvious. Most investors scoff at the idea of founders using their capital to fund a founder’s bank account, but if that means getting a hot deal on competitive terms, they may be open to it. For the rest of us, it’s not a dice.
In this case, most of us founders either have to sell the business (or part of it) or find some sort of way to secure the business to lend against.
There aren’t a ton of other options. Until then, we bow our heads, wrap our leftovers, and grumble about another day until those paper stocks are worth heaps of gold.