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Comment by peterjancelis | Hacker News Reader

Maybe the title can mention that this 50 million is a credit facility, not equity funding.

Loan funding is still funding. In the startup world people think funding== equity funding, but that is not true. Equity funding is normally the most expensive kind of funding. Glad to see they can grow with loans instead.

Yes, totally agree. Any rational entrepreneur leverages his solvency into debt funding.

So what is that to us who don't speak English natively, a loan?

Actually, in simple terms it's like having a big credit card with $50m in a line of credit. Saying this is funding is like saying I just received $5,000 every time I open a credit card.

Yes, it's money now in exchange for money in the future, vs money now in exchange for ownership.

Sort of. It's a "line of credit" which, ideally, means potentially money now in exchange for potential future money, more like an overdraft than a loan.

That is, they shouldn't be paying interest on $50m sitting in their bank account right now, but would instead pay interest on what of the $50m they actually choose to use. I don't know if it's different in the US though.

I recall Richard Branson mentioning this sort of arrangement a lot in his autobiography as to how Virgin managed to keep going.

Wouldn't this be a better deal than money in exchange for ownership? I mean, they get the money and still have control of the company.

Yes, but not all companies can raise $50mm on credit. Digital Ocean is already well-established. If you're a start-up, people aren't generally interested in investing X dollars at a small percentage return.

Yes, exactly. But getting a loan or a line of credit in the multi-million dollar range implies a certain level of trust in the viability of your company which typically is lacking in most early stage startups. The risk associated with venture capital transforms that relationship into not merely a financial transaction but more of a partnership, which is why equity is typically given.

Companies take debt to optimise tax.

@edwinyzh as I understand it, basically you deduct the debt from the profit and pay taxes only for the remaining amount. Wikipedia has a very short article on this [1].

[1]: https://en.wikipedia.org/wiki/Tax_benefits_of_debt

Well, I need to ask what does this mean, I appreciate it if anybody can explain in with an example :)

The better wikipedia article would be http://en.wikipedia.org/wiki/Tax_shield

Debt itself (as a liability) is definitely not deducted from profit, but repayment of debt is deducted from the profit, and - what is more important - interest on debt is deducted from the tax base as a result. Which means that if you can load up on debt to get higher return, than you would get investing your own money.

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