Comment by lionhearted | Hacker News Reader

Comment by lionhearted | Hacker News Reader

So that's around $33k USD.

They're only looking to be paid back if you reach profitability.

6% equity to get a $33k loan and some sort of training/advising for 13 weeks at their facility, and office space afterwards? Could be a good deal, especially if you have a new business that requires medium amounts of capital costs to get started. If you're getting something manufactured and your first run/prototyping/etc is going to run you $15k, it might be good to do that on their dime. If it works out and you get profitable, you pay them back and they've got their equity. If it fails, they're out the money.

Could be good, depending on your circumstance and the specific terms on it. I could see lots of cases where that'd add far more than 6% chance of success and value to the business.

Edit: Gosh, a lot of reply comments. To clarify:

-You should always, always read the terms carefully in any important contract you're going to sign, and strongly consider hiring a lawyer to give it a once-over.

-In this particular deal, you'd want to make sure the loan isn't personally guaranteed and what the terms of calling it are.

-I could see times where I'd be ecstatic to take this. Lots of brand new companies would have a much higher success chance and EV with 94% equity, $33k cash in the bank, and $33k in debt with flexible repayment terms than 100% equity, $0 cash, and $0 debt.

-Money's worth a lot, and people often underestimate how much it's worth. Especially for an unproven, speculative venture.

-It might or might not be a good deal depending on your specific circumstances, and the exact terms of the loan. Again, read contracts carefully and strongly consider hiring a lawyer to look it over.

-As always, consider not making flippant comments on Hacker News? It's kind of tiresome to get ignorant and flippant replies when you're trying to do a neutral, factual analysis.

The whole reason I wrote the post is because they're acting as if it's normal to ask for equity for a loan (and a tiny loan at that). YC, TechStars, Seedcamp, etc all invest in their companies - not loan them money.

The whole thing smacks of a rich guy who just thinks he can throw around his money, call it an 'accelerator' and take candy from babies.

I'm doubly angry because here in the UK, we're struggling to get support for new startups and entrepreneurs. Shady deals like this only make it harder for people who genuinely want to support startups (like Seedcamp) to gain traction in the mainstream media.

Slightly OT: You may want to remove hyper-linking to them in the article. You do not intent to promote them, right?

I can't make a valid argument without linking to the service I'm calling in to question.

You can use a rel:nofollow link. Then search engines won't take it into account.

Good point. Cheers.

It doesn't say anything about not having to pay it back if you don't reach profitability. Their answer to "Do I have to pay back the pre-seed funding?" is "Yes".

Did you stop reading right there? Here's the next line -

> When do I have to pay the pre-seed funding back? Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.

It makes it sound like the loan is to the business - with limited liability, you don't have to pay it back if the business fails.

They say they're flexible on being paid back, and do it on a case by case basis. Anyone doing it should read the contract/loan terms very carefully to make sure there's no personal guarantee and what Oxygen's rights to call the loan are. But assuming the contract terms match the general vibe they've got on their site, it could be a good opportunity. Again, depending on the specific terms and circumstances.

It certainly _sounds_ that way, but the fine print is what matters. Is the loan a liability of the founder? or the company? Are these super-early ventures actually incorporated? Do they have the savvy to ask these questions? For the sums involved they certainly can't afford much legal advice.

And the structure isn't necessary to meet the stated goal of an "evergreen" fund, as equity returns on successful venture should fill that need.

It's an odd structure, at best.

I've seen loan-for-equity twice in real life, and both times it built profitable businesses. Though they were both older types of businesses with established business models that needed capital to get started, not technology.

Anyways, yes, you should always read the terms on an important contract very carefully, and here's no different. Probably a bad deal if there's a personal guarantee on the loan.

But assuming the contract is square, I could see circumstances that I'd take this deal in a heartbeat - starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it'd have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.

Thanks for being the voice of reason lionhearted. It's a little to early to condemn this incubator. The rush to judgement does highlight the need to be totally transparent these days. If you fail to spell out your terms clearly you're going to get raked over the coals by some blogger.

BTW. I don't see what's wrong with a personal guarantee. It's nice that you are willing to risk other peoples money, but I think you should be ready to "make one heap of all your winnings, and risk it on one turn of pitch-and-toss". Then you'll be a man.

The problem with a personal guarantee is that the lender will always take everything they possibly can, and a personal guarantee leaves no boundaries. It makes it impossible to start up without risking fundamentals of life like housing and transportation, and almost definitely leads to bankruptcy in case things go south. This is OK for some people in the 18-25 age range when they can just go move back in with Mom, but it doesn't work for people with families, people without a safety net, etc.

Your lender is not risking his house to loan your company money and you shouldn't risk your house either, especially if you have a family. It's not so easy to start over once you get married and have a couple of kids, and it's not worth risking getting thrown out on the street if it means your children are going to be sleeping in the gutter.

Worth adding that given the likelihoods of failure of a startup (high), risking the house on it would be insane.

yeah, they say that if you work for someone who puts their own money in to the business you have an insane boss.

On the other hand, this is how most small businesses owners I've met did it. Most of us lack the connections to get people to give us money on "eh, if it doesn't work out, we forget about it." terms.

Hell, try to get any kind of lease as a small company without personally co-signing. "If you don't believe in your company, why should I?" is something that more than one landlord has told me.

So yeah, while you could say it is insane, it's also quite difficult to get a company off the ground without accepting some personal liability on the downside.

the 'safety net' that saved me from bankruptcy (and bankruptcy will save your children from sleeping in the gutter) was personal earning power; in '06-early '07, when my company was deeply in the hole, I found a body shop willing to do corp-to-corp and turned myself out. I worked for other people until the debit was paid off[1].

The other side of that is when you think about what 'deep in debit' means, you should calibrate that to your own personal earning power. This is easier than it sounds; it's hard to get people to loan you more than you can reasonably pay back. Your creditors fear your bankruptcy more than you do.

From what I've seen, starting a failed business does not decrease your earning power. I know I'm a more valuable employee now; aside from the technical skills I've obtained, I now understand a lot more of what the boss actually wants. (unfortunately, most of that knowledge only applies to small companies. Large corps, it seems, operate under different rules, rules I still do not understand.)

[1] I ended up deciding not to shut down the company, so I continued the arrangement until the company was making enough money to pay me a living wage.

"Hey guys we're really just a bunch of cool, laid-back guys who are only interested in the success of your business. SRSLY"

I'd be very interested to see what their rights to call the loan are. If they demanded to be paid out of the next round it could be disasterous.

"Don't worry", coming from people who I'm going to owe money to, generally makes me worry.

Phrases like "Don't worry" and "Trust us" would cause me to walk away immediately.

How did you conclude "loan is to the business - with limited liability, you don't have to pay it back if the business fails." from "will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis."? I won't.

It just means, they rather discuss the terms of loans individually, on case to case basis.

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