The Canadian Stockbroker© | TCS newswire™ ; Where is the security

M. Shane David

Where is the security to
invest in a start-up company the investor
requires?

If you're thinking that some companies in start up phases might make bad investments because their security is low or non existent, think again.

Start-up companies who seek capital investment funds (usually extremely aggressively) to pay bills or to have their dream get some wings are asked for security. While looking for investors, the company continues its operations and moves towards its goals while it finds finances. With any luck, it will get its act together find visionary investors and become stronger than before continuing to grow. If the company cannot generate enough start-up capital and begins to have problems paying off its creditors or getting to its target market and cash flow it will close or be forced to change.

In secured financing the debtor company in good standing manages its business and is in possession of its own assets. In unsecured financing the debtor company is partially controlled by the creditors, and completely controlled soon after the conditions of the credit are breached. In either case when the company fails to perform or meet its obligations to lenders the results are the same or at least the process does not differ.

The failing debtor company must then file a plan of reorganization with the creditor’s council. If any of the creditors are to receive less than full value for their claims, they will have the right to vote on their acceptance. After the vote, the court can then elect either to accept or reject the plan. So the company has some flexibility, but if it tries to deal too harshly with various creditors, its plan isn't likely to be approved.

In most cases of failure to meet its obligations, the company will have to sell off assets to raise money to pay creditors. The proceeds usually won't be enough to pay all prioritized creditors in full. So the creditors can take a reduced amount of money, and/or some stock in the reorganized company. Creditors don't have to share anything with existing shareholders. Even the insiders' stock stakes are generally always reduced to zero value.

If you notice much attention being paid to creditors and little to shareholders, you're not imagining things. Those who hold shares of common stock in the company are not near the front of the line. They're behind debt holders, merchant creditors, trustees, employees, the Tax Man, and even preferred shareholders.

Some companies in money troubles, start-up money shortages and debt do emerge from it and survive -- but many don't. And with those that do, it's rare for insider shareholders to benefit unless they are part of the fix. Insider shareholders are the least secured and as they're last in line the creditors and preferred shareholders are in control of the company.


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