If a startup asked you for $5 million in exchange for some of its common stock, and it said it would use the $5 million to pay d
If a startup asked you for $5 million in exchange for some of its common stock, and it said it would use the $5 million to pay down debt, would you invest in the startup? Was asked this in an interview some time ago, didn't get it right...
No. The return on paying down debt is very low. You shouldn't accept a low return on a risky investment.
No, because they aren't generating enough in sales to cash flow and service the debt. They will most likely be bankrupt shortly and your shares worthless. Also they are not good at managing cash if they need an injection.
I don't care as much about the pay down, just because they need to pay down debt doesn't mean it's a bad company. If they were a fast growing startup that just got to breakeven and wanted to pay off debt faster it might not be a terrible investment. We would need more info to decide.
The big issue for me is that common stock can get diluted. I'd want to be preferred stock or to be senior as possible on the cap table.
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