Comment by ewindisch | Hacker News Reader

Comment by ewindisch | Hacker News Reader

It's been argued that the deal structure of companies, particularly unicorns, has begun to look like debt[1].

Low interest rates and easy money has created debt. Massive bubbling amount of debt. Crashing debt bubbles is not fun, just ask anyone that lost their shirt in 1929. There is a paper[2] from this past June that goes deep into this, highlighting how and why debt bubbles are so dangerous. TL;DR? At least checkout this Bloomsberg article[3].

I think there will be a number of unicorns that are successful. I don't even think this will only be those that are profitable. Like always, there are companies that are overvalued, and some that are undervalued. I don't think it's a 10/90 split as has been suggested by some, but the next couple years will certainly be interesting.

[1] http://blog.samaltman.com/the-tech-bust-of-2015

[2] http://conference.nber.org/confer/2015/EASE15/Jorda_Schulari...

[3] http://www.bloombergview.com/articles/2015-06-26/the-reason-...

Have to disagree. They're still preferred equity instruments with unique trigger provisions. Higher up in the capital structure but not debt; you can't credit bid using these instruments in a Chapter 11 scenario and they aren't afforded the same protections in bankruptcy court. What attracts investors to debt instruments are the interest payments. You'd prefer PIK (payment in kind) interest on debt as opposed to cash payments in a low interest rate environment but that doesn't translate to pref equity instruments.

The unique feature of debt vs equity is that debt has a concave investment profile; you know exactly what you should be getting upon maturity (principal + interest payments). Equity has a convex investment profile; you get the residual value after subtracting face value of debt from the enterprise value.

Great points.

I think the confusion is due to the fact that debt can (and will) be restructured in a downturn, just as equity will lose value. So they're both risky when you make a poor investment.

But, as you note, debt and equity both have distinct risk and payoff profiles that are determined by law.

But if we just keep interest rates low / near-zero forever, then we can keep inflating the debt bubble forever too! Problem solved!

I agree with it being more debt like and less equity like. And when a new investor re-writes the term sheet such that their liquidation preference is satisfied ahead of everyone else, it is just like having the bond issuer return pennies on the dollar for net negative return. And if you're looking at a $100M write off, that can fund quite a few lawyers prior to leaning back for that hair cut.

Bond holders get paid before stockholders. But this is explosive debt.. E.g it has a liquidation preference.

I can't really sympathize with startups affected by recent Fed movements. If you picked investors that actually care about a ~1% change in risk-free interest rates, well, I have a pull a Captain Hindsight here ...

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