Idea: 61
Monday, 02 March 2015
By. Francis Pedraza
Daddy Gobseck
A high-yield debt fund with an upside-down model for investing in startups.
The DG model works like this: DG loans $10,000 to $250,000 to startups with clear business models, direct paths to profitability, that need some money to get going, but will not require ongoing financing. The average loan size is $100,000. DG is willing to be the first money in. Instead of taking an equity position, DG takes a debt position. Equity represents unlimited upside, debt represents limited upside (read this capital markets thesis). So founders are motivated to take capital from DG because it lets them preserve the unlimited upside of their ownership.
DG loans have fixed models, so there’s transparency on both sides, without the need to waste time with negotiation. Take a look and see for yourself — rough draft model! DG currently offers 6–10 year loans. The loans accrue at 25% compounding interest per year. 4 years before the loan is due, the interest stops accruing (phew!), but payments must begin (darn!) OR the loan converts into equity at a $2M valuation.
Questions? Of course you do. Check out our FAQ.
Questions for Cheeky:
- Overall thoughts and reactions?
- Would these terms be attractive to you as an entrepreneur? As an investor?
- Ways to improve the model: change variables, terms, scenarios?
- What expected failure rate would you build into the model?
- Other?
