[Anon1096]

For one, in a mortgage the loan is secured by the house. But more importantly: you can get simple loans for startups too! Banks provide loans that are personally guaranteed (ie if the business goes under the founder is still on the hook). But if you want more money or something that is limited in liability then your pool of people willing to give money is much smaller and they usually want a stake in the business as a condition.

[ffsm8]

The opposite argument would be that the default should behave like the house then, so ownership should switch over to the person providing the loan entirely - instead of passing on part ownership forever.

But that's obviously less desirable to the person providing the money, and they've obviously got all the cards... Hence the argument of this post.

I wouldn't call it evil myself, unless I wanted to classify capitalism as evil in it's entirety - which would feel disingenuous to me, considering the alternatives were always worse in hindsight.

[labcomputer]

You aren’t thinking this through. If a startup defaults, it is because they have no money left (which is because they do not have a viable business yet). So there is nothing of value to repossess.

This is the same reason the bank asks for an independent valuation of a house (and requires the buyer to maintain insurance) before releasing the money to pay for it: The value of the collateral needs to plausibly match the value of the loan, so that the value of the loan can be recovered in case of default.

The only way this works is for the founder to personally guarantee the loan. Which means the founder needs to have sufficient personal assets to keep the bank happy. It also means the founder risks personal bankruptcy if those assets are not enough to cover the loan if the startup defaults.

[ffsm8]

Naw, you're making a claim that's just not true.

The company will have some value left on default. E.g if it's a software company it will have the IP for the software etc pp

Now wherever that's enough for anyone to be willing to take that risk with the loan is another story and thus I could now quote my previous comment in its entirety

[labcomputer]

Meanwhile, back here in reality…

Failed startups don’t have value left at the end. They go until they run out of money. Then they liquidate the office furniture to make the last payroll. Sometimes they don’t wrap up early enough and the founder and board members are personally liable for it.

Nobody wants to buy the custom software needed to run “The pets.com for GenAI” because it would be cheaper to start from scratch than to understand the codebase and make it do what you want.

Companies like 23-and-me that accumulate valuable data while going bankrupt are the rare exception… but banks/VCs do not know a-priori which ones will be that exception! If they did, they just wouldn’t make the bad loans in the first place!

> Now wherever that's enough for anyone to be willing to take that risk

Well, but it clearly isn’t, right? So everything else you wrote is sort of irrelevant.

I mean, why don’t you lend a startup $1000 on the condition they pay you back $1500 in two years[1] if they succeed and nothing if they fail? Pass the hat around your neighborhood and I bet you could fund a few real startups!

Except that.. oh.. when it’s your money on the line, suddenly you realize those are very stupid terms. You lose the whole $1000 90% of the time, break even 5% of the time and make a +$500 profit 5% of the time. The math isn’t mathing here.

So you’ll want to very carefully vet the founders and their plan. Be very picky about who you fund. Maybe you’ll ask them to personally guarantee some fraction of the loan. Suddenly, your highly moral terms look exactly like the business loans that approximately 0% of startups use because VCs offer them a better deal.

[1] Any more than that would be usury, which is immoral, right?

[ffsm8]

Take a deep breath and reread my comment please, you're interpreting things into it that I never said, and I'm not sure how you could've gotten the impression were in there - I merely pointed out that this behavior is core to capitalism, because the people with money own said money - and are in no way responsible to create a "fair" (from the perspective of the person receiving money) playing field

[HumanOstrich]

The residual value in the failed startup will be such a small fraction of the funding. You aren't making a convincing argument.

[ffsm8]

Did either of you actually read my comment?

I acknowledged as much... In both comments even.