Ask HN: two questions about seed loans
We're currently looking to take a seed loan in the amount of 10-15k, probably from someone we know, to bring us through the next 6 months of alpha development.
First question: For this kind of (high-risk, IT start-up) loan, what's a reasonable interest rate? Any considerations on how this is typically set up? What should we take into account in negotiating it?
Second question: How much of a financial cushion would you recommend taking? My most optimistic financial projections say that we will probably make it with 8k, but of course we want at least a little safety net for unanticipated expenses and delays. What kind of range do you typically see for start-ups' in terms of safety capital?
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I'd say as much as you can get, and then some. :)
In all probability, your projects will start turning out to be inaccurate as you progress. If and when that happens (I do hope it doesn't, but as they say, sh*t happens), having a good cushion will do a lot to your peace of mind and allow you to maintain focus.
One point of caution though: If you go this route, do not forget to maintain a strict financial discipline.
In the worst case scenario (which may actually be good), you will end up paying interest on the unspent money but the benefits of having it around should far out-weigh this. (You could also structure this so that you don't pay interest on unspent amount but that's a different topic.)
I'm going to make an assumption that they are looking for equity too, but I could be wrong.
Putting it together: they loan you money which you have to pay back with interest, and you give them a %age of whatever you build just as a topping.
You could go to the bank and get about the same and not have to give away anything. Is this really what you want?
Could you? It seems like a bank would want some kind of collateral for a small business loan (unless you spend 6 months trying to get a loan from the SBA). Unless you have a car or house you're willing to put up for collateral, I think the bank will just laugh at you.
But I'd love to hear from others that have secured loans from the bank.
Of course, a bank would not be interested in this; only an investor with a willingness to take a risk and some confidence in the endeavor. That is who we are talking about. I'm asking about what %annual interest is typical for an unsecured loan from such a seed investor.
We're not talking about stock because we don't have current plans to sell or go public, so stock wouldn't make sense from an investment perspective. I'm sure there have been other start ups who have been in a similar place; I'm wondering how they set it up.
For a pre-alpha startup, think equity. Any investor will want their chance at a return which reflects the opportunity costs and risks of their investment.
Edit: stock makes plenty of sense for investment. The purchase of equity is the same as buying a stake of future cash flows, whether this is as growth or dividends. Note that responsible directorship applies.