Entrepreneurship Offer Post-Banking
I have an opportunity I am conflicted on, and would like to know people's thoughts. The offer is essentially a loan paid out to me over two years in monthly increments. The amount is roughly 70% of my current pre-tax salary. The purpose is to provide a "monthly income" while I work on building a company. I just completed my second year of banking, but have always had an entrepreneurial itch. This offer allows me to continue paying rent and feeding myself without having to worry too much about finances. The repayment mechanism is what makes this unique. Instead of fixed payments after two years, the repayment can come in two different forms. The first is a share of my future income, say 10% of my future income should I start earning a salary again (aka if my company fails). The other option is to convert the loan liability in to equity in my new company should it show signs fo success and the ability to raise a round of institutional capital. I am generally avoidant of debt, but this seems like a nuanced way to be able to start a company without sleeping on a friends couch and eating ramen noodles. I'd be interested in thoughts or concerns here as I think through my options.
how did you get this? really interested in doing something like this.
Company called Chisos. Pretty sure it's still in Beta, but interesting concept. https://chisos.io
Neither options sound that appealing, under the assumption that you haven't blown through every last dollar from your banking stint. The structure/mechanism of the opportunity isn't a loan - it's a royalty (uncapped? or capped at principal + interest?) in scenario A and a convert. in scenario B, both of which are much more costly than debt.
The devil is in the details (terms) for this proposal, as they are with any royalty/convert. financing. Unless you can nail down specific terms for this offer, there's not much advice that others can provide. Accounting for the fact that you're debt-averse and keen on taking a stab at entrepreneurship, I'd use your savings from your banking stint first, and revisit the option for external financing once you're running low on cash.
Think about it this way - worst thing that can happen under this scenario is you run out of money and have to get a salary paying job again (with no debt). If the business is running well and requires more capital than what you had saved up, hopefully you've built enough of a track record to show to potential investors/lenders that you have skin in the game and can likely negotiate better terms for external financing.
If you commit to the offer, you'd either A. have to pay back that money out of your future earnings anyways (which is no different than spending your savings, on top of having to pay interest), or B. you'd be giving up significant upside from the convert., as "grass-roots" financing typically isn't cheap.
Good points from StreetofBulls, my question is do you have a company already in mind? You didn't mention already having an idea. Is your idea so good that the world cannot live without it, and you see a very scaleable project? If you're considering this without already having thought through a startup idea for a bit, you will struggle.
The overwhelming majority of startups fail, so on the downside scenario this is 1) a nice break from work for two years, but you need to consider how it would look on a resume/getting back into finance world and 2) the future income needs to be capped as that is likely where you'd end up.
My personal opinion is that coming out of banking you have probably the best exit opportunities you ever will. Go to PE, corp dev, something new, and fulfill your entrepreneurial passions later in life when you have the required experience, connections, and $ safety net. But if your idea is burning you up to go now then just make sure the terms aren't killing you on the other side.
Good advice on having an idea first.
I think the deal structure is shit though. “Take my money, if your business works I want a royalty until I’m paid and then some, if it doesn’t I want 10% of your future earnings until I’m paid back and then some.”
Like others have said, bootstrap your idea with your cash. If it’s good, you can raise funding with better terms. If it fails, you won’t have the liability of paying back the lender.
I disagree with the above in that if you really have the itch and have a good idea then go for it now. Otherwise you’ll live in your comfort zone until “you have time” (aka retired) and by then you won’t have the energy or enthusiasm to make it happen. I know people that have said they’ll do things when they retire or when it “makes financial sense” and it all ends with them never going for it.
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