00:00:00:00 - 00:00:25:14
Unknown
Welcome back to the episode of the start up therapy podcast. This is Ryan written, joined as always by my friend, the founder and CEO of start ups.com, Will Schroeder. Will you've done it? I've done it. Most of the startup founders we talked to have done it. We've put money in, we've accumulated debt, we've run up credit cards. We've done lots of things in the name of building our business that were not in the name of our own financial security.
00:00:25:16 - 00:00:46:07
Unknown
When do we get paid back? How often in the history of history to people get paid back for this stuff? If we're talking about when do investors pay us back for all the money that we've put in? It's right after never. That was it. And that's the thing again, this is we always joke about you. No, nobody put this in the instruction manual.
00:00:46:07 - 00:01:05:15
Unknown
Nobody put this in the brochure. There's this idea, and then I think it's. And it's a reasonable conclusion. It's just completely false. That's what we're going to talk about today. I think there's a reasonable conclusion when we start a business that if we borrow money or invest money from ourselves, that money will get paid back or at least could get paid back.
00:01:05:17 - 00:01:23:03
Unknown
So the idea is, hey, I borrow, let's say this, an actual loan. I borrowed $50,000 from a bank, maybe an an SBA loan or something like that, and I got to pay that back. So when I raise capital from investors and they're going to help pay that off. Right. Or I took out money out of my home equity loan.
00:01:23:03 - 00:01:50:01
Unknown
Just different version of a debt. And I'll get paid that back right. And what we find out over a way to a long period of time is the answer is no. And so today let's talk about all the things we will not get paid back and why. What do you think are the most common ones? Because we think about the ways in which we accumulate this money, like this debt, run this money.
00:01:50:03 - 00:02:06:15
Unknown
What are the most common ones? The early stages. Typically it's going to come from either, salary or a loan, say loan. I don't it doesn't have to explicitly be a loan. It's just money we took out of somewhere, whether we borrowed it or whether it was in our savings account to put it into the company, happen in the company.
00:02:06:17 - 00:02:30:00
Unknown
So let's break them out separately. Okay. The first one is obviously salary. And here's the thinking. The thinking goes something like this. I was making, let's say $150,000 at my last job. Doesn't matter with the numbers as being $150,000 at my last job, and now I'm only taking $50,000 salary. Obviously, I'm going to need to get paid back for that $100,000 that I didn't get paid.
00:02:30:00 - 00:02:50:21
Unknown
Just a couple of quick catchup payments. No big deal right now. Here's a before we go further into it. I think what's kind of interesting is will we have those conversations with they typically involve our spouse if we have one. They typically involve each other as co-founders. Right. Hey Ryan, you put in 50,000, I'll put in 50,000 and we go raise more money.
00:02:50:21 - 00:03:06:23
Unknown
We'll get that back so we can keep growing. The company is sounds pretty good. It's definitely always feels better to be diluted with someone else, right? Like when if we're going to be delusional. Better to have a friend. Sure. But I also think we make like an implicit pact. Let's say we go back to our spouses or you go back to your wife.
00:03:06:23 - 00:03:26:04
Unknown
I go back to my wife and we both say, hey, we're to take $100,000 out of our 401k or kids education fund or doesn't matter. Right comma. Don't worry. We're going to go raise funds and we'll get that money right back. Or we're going to go rack up credit card debt, which is the most likely outcome. But again we're like, that's okay.
00:03:26:10 - 00:03:47:18
Unknown
Because that's just to get us started. Once we get a little bit bigger and we start raising some money, it's all good. Investors will help us pay those debts off and we'll be good. We actually believe that. Except it doesn't occur to us that no one ever said that was true. Kind of a big bet to make. There is there's a really important voice missing from those conversations.
00:03:47:18 - 00:04:01:12
Unknown
The people that you thought were going to give you the money to pay it back, right? Talk to your spouse about it. Talk to your co-founder about it. You might want to talk to the people who are going to write the checks that you think you're going to reduce by the amount you want to be paid back, the challenges.
00:04:01:12 - 00:04:20:21
Unknown
Those people aren't in the room yet because they're a couple years out or whatever. Our timeline is right now, you and I are just thinking about quitting our jobs and starting this thing. So the person like you're talking about the expert that we need to give us, the answer actually isn't present and doesn't become present until about the most inopportune time.
00:04:20:21 - 00:04:37:12
Unknown
Yeah. In this whole process, when we're out of money and we need money, and when they're there to tell you that no, they're not going to let you take money from that investment to pay back those debts. Here's what this looks like a few times a week. Right. And you and I get somebody that comes to us, a founder, that we're trying to help raise money, and they say the same thing.
00:04:37:12 - 00:04:59:19
Unknown
And I get it, because you and I have been there. So. So we get it. They say, hey, look, up until now, I normally got paid $150,000 salary in my last job, but for the last 8 or 2 years or whatever, the time frame is, I've only been paying myself $50,000 or maybe nothing. So obviously I'm going to need to be made whole for that because that was an investment in second.
00:04:59:21 - 00:05:22:11
Unknown
I've got $50,000 sitting on my credit cards right now, and we took a loan out from whatever company for another $50,000. The company owes those where I was going to have to pay those back as well. This just happened a couple weeks ago. I stumbled across a slight conversation within the Starbucks community where they were having this discussion around, hey, yeah, we're all in this same boat of having taken out a bunch of money.
00:05:22:13 - 00:05:47:12
Unknown
We're all about to raise funds. Let's figure out how we get paid back this round. Right? So sadly, my very succinct answer was two words. You don't. Right? Yeah. which sucks would suck. It's an awful answer. It's an awful answer. But yeah, just the answer. Right. So just because those investors aren't in the room when you're making those deals with your spouse, with your co-founder, doesn't mean that if they were in the room that they would have gone, yeah, that seems reasonable.
00:05:47:12 - 00:06:07:09
Unknown
Let's go ahead and do that. That's the thing. So in our minds, the company can create a debt and that debt is required to be paid back. So you'll talk to an accountant. This is hilarious. Here's what they'll say. Oh don't worry about it. Just take whatever debts you're creating. You put those on the balance sheet and now the company has to pay them.
00:06:07:11 - 00:06:31:21
Unknown
They're on the balance sheet. They're on the balance sheet. Yep, yep. One more voice. Yeah. As the conversation. It still isn't the right voice. Correct? Yep, yep. That would be called an IOU. Never. Yeah. That's when it's going to get paid. We talk about this it again. We're laughing about it. For the folks that are in this right now, the folks that are hearing this for the first time, they laughing right now, right?
00:06:32:03 - 00:06:51:05
Unknown
Those folks are like, wait, are you guys serious right now? Because you seem pretty cavalier about something. That's pretty disastrous for me. I'm laughing about it. Maybe you are too, because I've lived it. I like I, I went through the same assumption. Yes. Yeah, yeah, I've, I've heard this more than once. It was. I was like, fool me thrice.
00:06:51:05 - 00:07:12:11
Unknown
What is that one. What's that one called? I had this idea. So. So I'm going to go many moons ago I started a company and we were raising venture for years. It'd be easier. This is going to take forever. Yeah, decades. And, we started a company and I'd put in, let's call it, about $200,000 of real money.
00:07:12:14 - 00:07:34:12
Unknown
Right? Not. Hey, this is money I wasn't otherwise getting paid. Forgone salary. Some sweat equity. Right? No, it's just cash from somewhere. Paid into an account. Yeah, exactly. Yeah. No, this was actual cash. Yeah, yeah. And so go to raise money and we're doing our seed. Right. This is going to be a $1.5 million seed round. And we go to the investor your first investor who was gung ho to invest.
00:07:34:14 - 00:07:56:18
Unknown
It has we present our financials. We basically say hey we've had $200,000 invested so far right. That part of this, etc., etc.. And he looks at me like I've got two heads. What he's I don't care how much you've far now when he says that he's a good guy too, is a friend of mine, right. What he was saying is that money is gone.
00:07:56:18 - 00:08:18:12
Unknown
Dude, and you're the only person that doesn't know it. And I'm like, I was like, I was proud. Even now that you've said that, I still don't know it. It doesn't. That doesn't make sense to me. Why is this happen? Dude, I was proud to tell him that this money is a big investor that we need to recoup their money.
00:08:18:12 - 00:08:44:15
Unknown
Because guess what? The moment he puts in his money, he's not going to let anybody forget that he's a dude. I put in 1,000,005. I got a preference on that. I'm getting that back, etc. and I'm like, why wouldn't that work the same for me? And this is where you'll start to learn that it's all about who's investing next in that person, doesn't give a rat's ass about who invested less, particularly the founder round, if you will.
00:08:44:15 - 00:09:02:17
Unknown
The the founder round tends to evaporate over time. Yeah. Oh the fun. The founder round isn't even really around. Right. And look, to be fair, I like let's let's back up on that little bit. Are investors doing this because they're mean, cruel, evil people who want to see you suffer longer than you need to know. They're just trying to make their money make money, right?
00:09:02:21 - 00:09:22:01
Unknown
Same thing you're trying to do, right? And remember, when you put your 50,000 in credit card debt in, you also had 100% of the cap table. You were incentivized to do it right. And to your point, once these things are done, they're done right. We are not filling buckets with water that's already passed under the bridge. And that's exactly the point you're making now.
00:09:22:01 - 00:09:39:11
Unknown
All right. Which is the next investor round. Doesn't care what happened in the previous round. They just under they won't understand. Just what are the deal mechanics for me. What am I going to get from this. You bet. And to be clear, it's particularly that founder round that gets squeezed the baton round being again we're just calling it the first money that anybody's ever put into it.
00:09:39:11 - 00:10:00:13
Unknown
You took our own money, right. And again, I'm also lumping money in time to be the same thing. Going back to what we said a moment ago when we said $150,000, let's say, Ryan, you and I are co-founders. We're both making $150,000 in market. We haven't been paid for the last year. There's a $300,000 total debt that exists at the company that needs to get paid back because of the are investment.
00:10:00:13 - 00:10:16:05
Unknown
Stick on this for just a second because I think this is really interesting. I think it's really interesting is a great point here. It doesn't matter how believable the calculation is, whether it's, oh, this is true market salary or this is money that I put in for my checking account. I emptied my 401 K, I took a loan from granny.
00:10:16:07 - 00:10:47:06
Unknown
The point here is it doesn't matter because it's not getting paid back anyways. That's it. So it doesn't matter how much we justify it, how much your account says it's real, how much grandma remembers it's real. It's not real for anybody else. It does. Yeah, it actually doesn't matter. And and so as we try to justify this more we say hold on investor person, you're telling me that if Ryan and I invested $3 collectively in another startup, that we could get our money back, that would literally be the preference payment or anything else like that.
00:10:47:08 - 00:11:10:00
Unknown
But if we invested in our own startup, we can get it paid back in in. The answer is 100% yes, and it makes no sense on paper. In until you understand the rest of the equation. Which leads us to why would an investor invest in something where they have to pay back debt? Okay, so so let's zoom out a little bit in.
00:11:10:00 - 00:11:33:21
Unknown
Let's look look at things from not our eyes were well aware what that looks like. Let's talk about it from the investor's eyes okay. First things first, Ryan. If you and I say that we are investors and we've got a check to write, how many new friends are we about to make? Oh, all of them. Right. If you're adding so many people coming to you with deals, which means you have options.
00:11:34:00 - 00:11:55:21
Unknown
Lots and lots of options, right? So a good rational investor does this well, does it for a living. And there are only so many. But they exist. Could look at as many as 10 to 20 decks a week, maybe more depending on who they are. If you're looking through 10 to 20 deals on a given week, or two of them, have some bizarre IOU that the founders have written to themselves.
00:11:55:21 - 00:12:21:23
Unknown
So basically anchor that they've attached to this deal. Why would you spend time on that deal if there are 18 other deals that simply don't have that problem? This is let's can we say this 2 or 3 more times because this is super important, right? I think it's so easy to forget when we're out stomping around with our pitch deck and we're presenting our deal to people we forget that this is a competitive environment, right?
00:12:21:23 - 00:12:40:02
Unknown
So to your point, there's 10 or 20 other decks that they're going to look at. Do you want to be the one out of 20? Let's just say all hell, all else held equal. Let's say you were one of the top three, right? And then you go on and on about this money that you need to get paid back in these decisions that you made that you're no longer happy with and you want to rectify with their cash.
00:12:40:02 - 00:12:58:17
Unknown
Where do you think that puts you in the overall rankings at this point? Right. Do you think that might impact the decision of the investor? It's interesting to me, and I don't think this is something that we've talked about before, but do we even introduce this into the conversation? Right. You and I would argue no quarter, you know, because we know it's not going to get paid back anyways.
00:12:58:19 - 00:13:17:21
Unknown
But it's not one of those questions where it's you're probably not going to get paid back anyways, but it's probably worth asking in my opinion. Curious to hear yours. I would say it's probably not worth asking because if the most it's going to come of this is going to move you somewhere down in the list because they're going to go, hey, I've got a bet on two people in a race.
00:13:17:21 - 00:13:34:01
Unknown
They seem to be wearing the same gear. One of them's carrying a boat anchor for some reason, right? I think I'm going to bet on the other one. I just going to guess here, right? That that maybe that one's going to run faster. You know, something that's really funny about everything we talk about here is that none of it is new.
00:13:34:05 - 00:13:55:14
Unknown
Everything you're dealing with right now has been done a thousand times before you, which means the answer already exists. You may just not know it, but that's okay. That's what we're here to do. We talk about this stuff on the show, but we actually solve these problems all day long at group start start ups.com. So if any of this sounds familiar, stop guessing about what to do.
00:13:55:16 - 00:14:13:01
Unknown
Let us just give you the answers to the test and be done with it. I actually lived this first hand. I lived this first sector. I'd done the deal where I'd put in a couple hundred thousand dollars and the investor did end up investing, but completely forgot about my $200,000, right? Never saw that money again. The second deal.
00:14:13:03 - 00:14:30:02
Unknown
Well, we are at the goal line. A term sheet stage in a great position with with a big name fund. It was first round. It was for Josh Goldman's fun first round ventures. Right. Great. Another great fund. And first round had a term sheet. We're negotiating through. Everything was great. We were really excited and I've always wanted to work with Josh.
00:14:30:02 - 00:14:55:10
Unknown
And I always want to work with that team. And we get to the goal line and I'm like, yes, among the co-founders we need, we need to be at about $150,000, give or take on salary. And they were like, you're raising $1 million. And we're like, In there? Like you're saying that you're raising $1 million and you want to take literally half of that in the first year and pay three people with it in.
00:14:55:13 - 00:15:18:15
Unknown
Rick. Is that a problem now? No. You got to understand, I hadn't done this enough yet to understand it. This is exactly why we do these podcasts, right? It's why we have startups.com. So other people don't have to learn this lesson in real time in the middle of the game, which is exactly what I did. I looked like a complete amateur.
00:15:18:18 - 00:15:37:16
Unknown
Yeah, that's exactly it. And it calls everything else into question to that point too. Right? And they're like, what else do you not know about life? But, sir, I'm 22. How deranged is this guy otherwise? In it was a fair question. And they bailed. They bailed on that point. It was disastrous. First, because we had to restart the whole round.
00:15:37:16 - 00:15:54:20
Unknown
We had to go back out. Fortunately, we ended up doing it. now that I think about it, the person that build us out was Founders Fund, but not the way I wanted to go. Massive egg on our face with all the other investors that were participating at the time because it looked like amateur hour. And that's the thing again, why would I have known that?
00:15:55:02 - 00:16:14:06
Unknown
Why would I have known you wouldn't? I made a basically the exact same mistake. Wasn't a venture round, was an angel round, and I had taken by but wasn't taking a lower salary at that point. I'd never really had a salary up until that point as the first business ends, but in my use of funds, like one of the things I had done was taken on some credit card debt, which I think a lot of us have done in the past, taking on some credit card debt.
00:16:14:06 - 00:16:32:20
Unknown
And I was struggling to keep up with that and make the rest of my ends meet. And so I, as part of my use, proposed use of funds. But I didn't want to say pay off my credit card debt. Those are personal credit cards. So I figured that doesn't make any sense. So I'm just going to. One of the use of funds was bump my salary and I forget the way it was put to me.
00:16:32:22 - 00:16:50:15
Unknown
He did. The male investor sit across the table from me, says, okay, so I see you want to use some of these funds to increase your salary. Like, yes, you can count. How much of a percentage increase are we talking about? It's this. Okay, what are you making now? And I said what the number was and he said okay, so here's how this is going to work.
00:16:50:15 - 00:17:07:04
Unknown
If I decide to invest, what you're making now will be exactly what you're making after the investment. I, I don't think he was trying to, like, tease me or be me, but I was leaning in, just like waiting. Okay, maybe this is going to be even better than expected. Or maybe I might have to go shoot a little bit.
00:17:07:04 - 00:17:19:14
Unknown
And he's like, no, you're going to be making exactly the same amount of money. That's not enough for you right now will be exactly what you're making after the investment. Should I choose to make it then? So, yeah. How would you know? Like again? Like you just. You don't know these things. You don't know these. There's no way to know.
00:17:19:14 - 00:17:32:11
Unknown
Yeah. I was going to say that was me. The classic where the guy, like, puts a I'm going to put a figure on this piece of paper and slide it across the table. And that's exactly what this is worth to me. And you flip it over, it's $0. $0. Yep. That's it. Here's your news. Here's your salary bump.
00:17:32:11 - 00:17:52:19
Unknown
Right. Let me, lay it down for you so we remember clearly. Awesome. Okay, well, let's take you back to the investor. Talk about why they're looking at this. So incredible. So let's go back to the first round. Right. First round's a storied firm. It's a great firm. Right. They have a million places they can invest. And we are fortunate to even be in a conversation with them, much less get a term sheet with them.
00:17:52:21 - 00:18:16:08
Unknown
But we blew it. We blew it because we didn't understand a very basic fact, which is lots of people want their money is not even specific to first round. You could apply this to tons of it. Really. Almost any anybody with a check. But we had a golden opportunity with a great firm and we blew it. We blew it because again, we didn't understand that they have 50 other choices.
00:18:16:10 - 00:18:35:08
Unknown
They don't have to cater to our one off delusions. That's the cool thing about being an investor. You don't do it now. Now let me talk about it from the other side. We're investors actually feel this same crunch. And I'm going to I'm going to get into a down round okay. For UB investing is the famous phrase she with the gold rules right.
00:18:35:08 - 00:18:57:02
Unknown
The golden rule. She with the gold rules. Which is to say whoever currently is putting in money sets the terms. If they don't like what the previous terms were of the valuation, the people's preferences, etc. here's what they say. They all go away. I will not invest. You do not get my gold unless everything is reset to my terms.
00:18:57:02 - 00:19:20:06
Unknown
Now, the first time you're going to feel this is the moment you go to raise your first money. And now the golden rule applies. The new person coming in gets to say, here are the new terms. Now here's where this happens to investors for for folks that aren't familiar with this because it's happening everywhere right now. Everywhere because the startup landscape for investing is so frozen right now.
00:19:20:08 - 00:19:39:01
Unknown
Here's what's happening, right. Let's say you and I went out and we invested in a company at $100 million valuation, okay. And then at that time, we felt good about it. Maybe we put $10 million in at $100 million valuation. We got 10% of the company pool, but that was two years ago or so, maybe three years ago.
00:19:39:06 - 00:20:01:01
Unknown
And the company's done. Okay. Not great. Now that company is going out, it's going to raise more money. But the new investor comes in, a new investor says, hey, I don't really care what you invested at last time, suckers. That was your problem, right? I'm going to invest $10 million at a $30 million valuation. And whatever you had a moment ago is gone.
00:20:01:02 - 00:20:18:22
Unknown
And we're going to argue. Wait, no. Go on. We still got our $10 million in there. We need to be able to get our chunk of it, etc.. And they're going to say, good luck to you. Yeah, they're going to say, here's the deal. you want my money? Then whatever deal you got in, remember, we're the investors in this case, it also applies to the founders.
00:20:19:00 - 00:20:39:22
Unknown
No care, new money, new rules. And so that's essentially the game that gets played. We just we're seeing it for the first time when we touch our first investor. Yeah. And like is there really any analogs where this would happen. There isn't really any other situation where this would occur in an early stage startup that I can think of, where we would feel that type of pressure or be forced into those kind of decisions.
00:20:39:22 - 00:20:54:15
Unknown
Right? I think it really is when we start to take on money. So we talk about this a lot, right? Is when we talk about the complexities of even deciding to take on capital because of these things, right? And especially because in a lot of cases, these are the reasons people wanted to take on cash. Why are you raising I've got this debt I need to wipe out.
00:20:54:15 - 00:21:16:00
Unknown
Forget that. Right. So are you not raising now because that wasn't going to happen. So now how do you feel in. So it's so important to have these conversations. And again, if you and I had invested in that first round. Right. Let that 10 million at $100 million valuation okay. We're going to try to fight with the new investors that next round of money to maintain our terms as well.
00:21:16:02 - 00:21:35:07
Unknown
And we're not going to get them because we might have said, which would be pretty standard fare that we have a $10 million preference on this investment, which for those that aren't familiar, just simply means that when if the company is to be sold, we get a $10 million check first before any other money gets divided up by percentages or anything else like that.
00:21:35:07 - 00:21:56:17
Unknown
So we basically get our money back first, and then we also get whatever percentage we have. Okay. Well, if that next year comes in and that next investor is like, dude, I'm investing in a $30 million valuation, right? I'm investing 10 million US. I'm not going to have you have a $10 million preference, and you get a third of the company that sells for 30, like your preference goes bye bye.
00:21:56:18 - 00:22:18:18
Unknown
Now remember, you and I put that money in explicitly with the understanding that if the company ever sold, we'd get our money back and we just got wiped. Okay, so that happens at every round. Now, next investor, the one putting in at this next round. Here's what they say. You don't like it? No, no I got lots of other options right now I got lots of other options.
00:22:18:18 - 00:22:32:04
Unknown
Right. Keep your equity right. Keep it of that previous valuation. Right. But at that point right. And this is the thing we have to understand. Like there's a reason the company's raising money at that point. Right. It's not just for grins. They need cash for some reason. Right. They need it. They need it to grow. They need to succeed.
00:22:32:04 - 00:22:50:21
Unknown
They need to even sell live. Whatever it is. Doesn't matter at that point. Right? It's very rare. Do we see a startup who's raising and conditions like that, particularly where you're facing a down round where it's positive circumstances? We're doing so well. What we would like to do right now is go out and raise on a lower valuation, just as a gift to the world.
00:22:51:00 - 00:23:09:23
Unknown
It's crazy. Let's talk about what are some strategies that people try to hand us that tell us, oh, here's how we can get it back. I'm the one that I heard early on, and I remember it was from like a good friend of mine in college. His father was an account, and he was like, hey, this isn't hard, man.
00:23:10:02 - 00:23:29:00
Unknown
Just make sure that any money you put into this, that you put on the balance sheet. Here's where things get a little bit gnarly when startups founders are getting into the business of starting companies, and they start taking advice from people who are the expert in a field that aren't an expert in a field, in the startup business, right?
00:23:29:02 - 00:23:58:02
Unknown
Lawyers, accountants, you name it. It's in other words, what they're about to tell you makes total sense. It just makes no sense here in it's actually geometrically horrible advice that can lead you to ruin. It's going to give you a sense of security. It's going to it's going to make you think or maybe make you make a decision because you go look, I'm willing to take this short term risk on liquidating portion of the 401 K, all the 400 and K, whatever that is, because the accountant told me put that on the balance sheet.
00:23:58:04 - 00:24:16:06
Unknown
And then of course, I got to go succeed and I have to go raise that next round. But I'm feeling good about the business. I feel like we're going to do that. Other people are telling me it's likely we're going to be able to go and raise those funds. Cool. I'm willing to take that much risk, but I'm not willing to let that money sit out there until I sell the company, which could be five, ten, 15, or never years from now.
00:24:16:08 - 00:24:34:23
Unknown
And we make a decision based on that advice. Right. And that's where these things start to go wrong. And you go, okay, cool. Now I get to that point again. You're having that conversation with the investor and they're like, yeah, no. Remember the part where you didn't ask your CPA for the $1.5 million? That's why I get to answer this question and not him.
00:24:35:01 - 00:24:48:15
Unknown
So this is where I get really worried for founders when they start to make decisions that are different than what they would have otherwise done if there was a look. I'm willing to risk some money to do this, but I'm not willing to risk my entire 401 K knowing that I can't get it back under any circumstances like that.
00:24:48:15 - 00:25:10:12
Unknown
I can't do right and look again. The advice is always well-intentioned. I'll give you another example. It's just really well-intentioned, horrible advice. It's when you talk to an attorney and they're like, hey, before you send this pitch, I got to anybody. Make sure you get an NDA signed by every investor. And I think to myself, has this person ever raised money?
00:25:10:18 - 00:25:30:03
Unknown
They may have done you the favor of keeping you from raising funds, right? Depending. Oh my God, it's the worst advice you could possibly give to a startup. Just. I'm sorry if anybody's hearing this for the first time just because we're here, no one is will ever sign an NDA. No. Why would you? Why would they? What's in it for them?
00:25:30:09 - 00:25:50:14
Unknown
Yeah. It's the worst advice ever given by really well-meaning but unseasoned attorneys. But Will, it's not an NDA, it's an NDA. It's a mutual nondisclosure. I also agree not to tell them any of your secrets that you're not going to tell me in the first place. Yeah, it's so funny. There's so many of these types of advice where, again, they're not ill intentioned.
00:25:50:16 - 00:26:15:05
Unknown
They're not even bad advice in the right place, but it's giving us some money. Okay, look, I'm running downfield and I'm getting close to being in a position to score. And my teammate passes me the ball. What should I do, like square up, catch it with both hands and pull it into your chest. All right. Great advice. If I was playing American football, but since I'm a soccer player, I'm just going to get a red card and be thrown out of the match.
00:26:15:05 - 00:26:37:20
Unknown
Right? Great advice. Wrong fucking game. This is the problem. Yeah. Yeah. Exactly. Yeah. In just again, well-intentioned. But in this particular case, we're using the same kind of bias. I see people come to us all the time. They say, I talked to a CPA, talk to an accountant, and they said, this is no problem. They said, you just need to put this on your books, as a debt that you will accrue, every month.
00:26:38:00 - 00:27:02:04
Unknown
Now, like any debt that exists for anything in the world, a debt is only as viable as your ability and willingness to pay it back. So, Ryan, if you and I started the company and we both agree that the $150,000 that you didn't get paid $150,000 that I didn't get paid, we'll go into a deferred comp account and it will, and we have to pay off that liability over X number of years.
00:27:02:06 - 00:27:27:14
Unknown
And we both agree that debt is valid. And we both agree that as the company grows, that will pay it off. Cool. Because it's in our best interest to actually do that. It's just not in anybody else's best interests to ever do that. No one cares, right? And so I think when we go into this and we're thinking to ourselves, oh, hey, these big investments that we're making, hey, look, right, these are serious investments, right?
00:27:27:14 - 00:27:52:01
Unknown
Not being able to take comp, especially through some of your higher income earning years, is dangerous, right? Pulling money out of your savings, which anymore is hard to even have, is dangerous. Like we've been talking about to do it on that assumption that we're getting it back in the way that we think we're getting it, like the investors are going to bail us out, and we're not making the case to not do these things right.
00:27:52:03 - 00:28:11:08
Unknown
You may need to pull money out of your savings. You may need to forego comp. In all likelihood, you will. That's it's just it's not by choice. And it's but specifically what people understand what the outcome of that is and that there isn't an outcome whereby investors just start to get together and be like, we really should consider how to pay those fellas back, right?
00:28:11:09 - 00:28:28:10
Unknown
They've put in so much time and effort, and I've just got all this money that I don't know what to do with. Let me just throw them some. You know what? Let's just tack on a little extra, right? It just doesn't happen. That's not it's is ludicrous as it sounds. Yeah. No one cares the errors. Now again, a couple of small caveats, right?
00:28:28:12 - 00:28:51:06
Unknown
There is no downside to recording all of this debt right there. Really. Is it to show how much you've put in to to show what's it's out there? It's like a fun conversation piece. But in the history of history, I have never in my 30 years, both running nine companies myself, helping thousands of companies. I've never, ever seen anyone ever get paid back.
00:28:51:07 - 00:29:06:08
Unknown
On top of that, I think when we try to saddle our own efforts, in other words, when we say, okay, hey, I'm raising money, I'm raising 1.2 million. Part of that is we've got $300,000 in a previous debt to a previous investor that that they need to get paid off. Right. They need to get squared up. Right. Same thing.
00:29:06:08 - 00:29:26:16
Unknown
We've been talking about the debt back to ourselves. If we try to layer in anyone else's debt, it's just is that right? It doesn't really matter who the debt is to the point is, investors aren't here to bail you out like they may be angels, but they're not saints. You know what I mean? Yeah, absolutely. Yeah. And look like your point.
00:29:26:16 - 00:29:46:10
Unknown
Like if you go and acquire another company, let's say we've done this a number of times. Sometimes those folks had assets and liabilities. All right. We go to the next round. We're like, hey investors. We bought a couple of companies and one of them had some debt. So during this round we're going to wipe that debt out. Now there may be a strong case for why that would actually improve the financial position of the company.
00:29:46:10 - 00:30:04:19
Unknown
Maybe. But they're going to come back with that same answer, which is, hey, remember that part where you signed the documents and bought that company, but you didn't involve me, and I wasn't there to tell you what I was going to do. I'm going to tell you what I'm going to do now. And it's not pay the debt that you accumulated or accrued were required.
00:30:04:21 - 00:30:23:19
Unknown
Yeah. So that million dollar question here, quite literally, how do I get paid back? Okay, I did put that. Why are you telling me it's gone. The money's on fire. Not necessarily. Here's how you get paid back. You sell the company. Yeah. Do what you set out to do. You sell a company and or you grow it and it has a ton of profit distribution.
00:30:23:21 - 00:30:43:06
Unknown
That's it. All those investments, whether we are willing to recognize them for what they were at the time, which is essentially an investment to get our equity, to make our equity have some level of value. That's how we cash in. The downside is no one told us. No one told us at the time that this was a one way street.
00:30:43:06 - 00:31:09:03
Unknown
That's a one way investment. But if we're being honest, if we're going at it from the very beginning, no matter how much we put in, no matter how much we sacrifice, etc., the only way that we're ever going to get this money back is through the sale of a company or some sort of liquidity event. And Ryan, I'm sure I speak for both of us when we say, I hope to help you get that money back and you get that liquidity event, because that's what this is all about, overthinking your startup because you're going it alone.
00:31:09:05 - 00:31:28:16
Unknown
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