[pclmulqdq]

Once your company is earning $10M/year, you should probably be using debt instruments instead, and paying yourself enough salary to cover the interest. That gives you a real tax rate on your cash earnings under 10% (and capped at the LTCG rate) if you can get a decent valuation.

[JumpCrisscross]

> gives you a real tax rate on your cash earnings under 10%

And turns your start-up failing (or firing you) into a financial end game.

[rexreed]

Can you provide some more detail or where to read on this debt instrument strategy?

[Swizec]

You can use anything as collateral for a loan, even business equity. It’s how wealthy people get liquidity without selling assets.

A HELOC loan would be a pedestrian example of this. You put house equity up as collateral to get money without selling the house. Fail to pay, bank sells house. When using your business as collateral, bank sells business.

[rexreed]

How would this translate to salary? Are you saying you'd get a loan on your portion of the equity at full value and the company would only pay you the interest required to cover that loan?

[Swizec]

Something like that yes. Mind you some jurisdictions have laws around “reasonable salary” so always important to check these things with a professional first.

For a more fun take: Watch WeCrash and notice how the protagonist magics 100mil for personal use after raising the huge Softbank round … and what happens to that liquidity when an IPO doesn’t materialize.

[rexreed]

How and when does the loan get paid off then? How is this better than taking salary without the burden of debt repayment?

[Swizec]

Alas I’ve never been wealthy enough to see how this works in practice. At my level (can borrow about 4 months worth of living cost) you do have to pay it off eventually, you just get quite favorable interest rates in the meantime.

[pclmulqdq]

Also, HELOCs have very high interest rates due to the illiquidity of the underlying asset. If you have a large private company that has some interest from private equity investors, you can get a much lower rate. ELOCs on huge blocks of the S&P 500 (essentially large margin loans) can have rates that are almost at the fed funds rate.

[rexreed]

I would imagine with the very high failure rate of startups, loans based on company equity, especially for small, non-public non-liquid companies must have sky-high rates.

[pclmulqdq]

You probably can't get an ELOC against common stock in a series A startup. You can definitely get an ELOC at a pretty decent rate against preferred stock in a startup that is at series D and has 100 employees.

The question isn't what the company is worth or how likely it is to fail, the question is what demand there is for the shares. If an asset is in high demand, and is relatively easy to sell (like company shares), you can get an ELOC against it at a great rate.

They won't give you 100% of the valuation of the company in the form of an ELOC (you may only be able to pull out 10-20c/$1 of startup equity you have), but they will give you a good rate.