Tim Draper argues founders should avoid taking investor capital when possible. He discusses leverage, personal guarantees, and bankruptcy protection, using Elon Musk as an example of a founder who borrowed heavily to build his companies.
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So then we want to negotiate how much you're making and we'll put in and we'll just say, look, if anybody is going to make more than $100,000, we want to know about it. Because this is startup and generally it's interesting as an entrepreneur, you will find that if you own enough of your company, It's better to pay yourself less than it is to pay yourself more, interestingly. Because if the typical price-earnings ratio is higher than a certain amount— I don't need to go into it too much, but it turns out sometimes it's better not to pay yourself at all because if you have enough stock in the company.
He has tax tricks.
Tim, is that what Elon Musk did? Boy, Elon did a lot of very interesting things. He actually borrowed from Tesla to give to SpaceX at one point and borrowed from SpaceX to give to Tesla at one point. Both were really dicey. You don't really want to do that ever. But he was just— he was saying, God, just a little more money here and we can make this thing happen. Just a little more money over here and we can make this thing happen. And he did it by borrowing against his own shares in PayPal, I believe. So he borrowed against his shares in PayPal. He leveraged to the hilt. Not a good idea. Generally, I'm going to give you a piece of advice that I think you will— will serve you well throughout your life. Do not borrow money. Do not borrow money unless there is no— unless there is a very limited thing that you're borrowing it against and you can afford to lose that thing. Okay, now, okay, a mortgage on a house, that may be okay. But in general— oh, and never ever personally guarantee anything. That's how— I'm just talking about how do I know of the people, not the companies, companies can go bankrupt all the time, of the people who have gone personally bankrupt, it's been personal guarantees and it's been borrowing money personally. So beware of those 2 things and I— if you learn nothing else here at Draper University, And God knows you haven't learned anything. But if you learn nothing else, that's it. No personal guarantees, and when you borrow, if you borrow, borrow against something that you do not— you are not afraid to lose. Okay. Sorry, another question.
Yeah.
Can you explain the personal guarantee system in the United States? Yeah, here's what happens. When if I loan to you and I'm a bank, I might loan to your business. And then I say, well, and if the business can't cover this, I want you to personally guarantee it. So that means if the business can't cover this loan and your business goes out of business, that's bad enough. But then they go after you. Take my home away. They take your house, they take your car, they take your— you're out on the street. And it's tough and that's the deal. So it's a tough job to be a banker. What if you earn good salary from your own company but don't spend it, save it and invest it in the later venture and earn more stocks? You can do that. You can buy more and as investor I look at that and I go, good news. He wants to put more money in too. Yeah, yeah. Did you have a question?
Yeah, just I want to say something. In the Netherlands, that's the only way to start a business, to be personally responsible, unless you have more than €500,000 in the first year.
And I have a very good friend— oh no, he's Danish. But I have a very good friend who was doing great. And then he personally guaranteed a loan to buy the newspaper. And all newspapers have gone like this. And he lost everything. And not only that, but he was $12 million in debt. And there's no bankruptcy protection in Denmark. And I don't think in the Netherlands either. So when you start your business, do it here.
No, but that's why you cannot fail in the Netherlands.
Right. Because they take everything. And having no downside. See, here at least you have bankruptcy protection. And even that guy who personally guaranteed something, he can only go to zero. And if you go through Chapter 7, and only go to zero, you actually don't have to pay taxes for 5 years. Kind of weird. It's like, yeah, you can go bankrupt and then don't have to pay taxes for 5 years. But in the— not in the Netherlands, but in Denmark, he was $12 million in debt. Now he's smart enough, he's actually pulled himself all the way out. Can you imagine that? It took him about 6 or 7 years and he pulled himself— all the way out of debt. But if he were— what's weird is in Europe, if he were not able to pay that, his kids would have had to. Yeah.
Or the people you are married to.
Yeah.
In my case, my parents have to pay it back.
Yeah. So I think our bankrupt— the best thing we got in the United States of any of our laws is the bankruptcy protection law. And that's why you can say fail and fail again You know, we've got other cool stuff, freedom of religion, freedom of speech, those are cool. But bankruptcy protection beats them all, beats them all.
