Aishwarya Dahanukar, co-founder and chief commercial officer of Tangible, explains why founders need to be mindful from day one of the capital stacks they create.
Building a business is not easy. Founders face crucial decisions every day and often have to go beyond their comfort zone as they work to get their business off the ground. And one of the most common themes to get wrong, often through no fault of their own, is building a coherent capital stack.
Why founders get it wrong
First, there is a knowledge gap. While equity is something most people know about to some extent, debt can be much more mysterious with a lot of hidden complexity. People often struggle to understand the different types of debt and lenders that are out there. There are also very different requirements and suitable use cases for different instruments.
And second, access to sophisticated debt providers that truly have the skills to underwrite novel assets is a real issue. While there is some limited access to generic instruments through venture debt funds and high street banks, this does not reflect the broader universe of specialised solutions that hardware founders need.
Read more: Tangible raises $4.3m seed round for hardtech debt platform
The dangers of incorrect debt decisions
As a result, we often see companies end up with capital structures that are not well suited to the business especially as it transitions from one stage to another. At the end of the day, all these different capital instruments have to effectively sit on the same balance sheet so it is essential that they do not conflict with each other or prevent the business from raising the type of capital it needs in the future, due to substantially restrictive negative covenants.
The implications of your day one capital stack are far reaching. This is not just about the outright financial cost of debt, but its wider (non-quantifiable) opportunity cost instead. A founder may unknowingly lose out on future growth based on the capital stack decisions they make today. It is important to stay a few steps ahead and build a business whose future needs are not ignored in the decisions made today. What looks like cheap debt today could prove to be costly in the future because it restricts any change in the capital structure without first getting lender consent, which is not as easily forthcoming as founders assume!
Read more: Funding the new frontier
The Tangible solution
Tangible has been created to be a partner for founders that want to create better informed capital stacks for their businesses over the long term. Traditional arrangers may not always have the education mission at heart. Tangible departs from that purely transactional model to educate founders at scale also using the help of technology. To the extent lenders have ongoing funding conversations where they think the founder would benefit from some of this guidance, then Tangible is here to help!
Sponsored content created in partnership with Tangible Finance.
