It’s almost sad watching Season 2, I’ve got to be honest. I mean, forget the production values, it feels predatory in a way that the later seasons (the seasons I started watching) haven’t.
First of all, Season 2 seems to have the highest number of deals where the entrepreneurs themselves admit that they need the deal or their businesses will fail. To have these people even come in, much less be given offers of 50% or more when they are given offers is, forgive the term, feeling like loan sharking.
I fully understand that these businesses are on their last legs and need an infusion of capital to survive. But I’ve yet to hear of one that seemed like it had a solid plan of how to really get things going again.
But there are far worse things than letting a business fail that is already failing. And one of those things is to be held personally liable for its debts rather than have the company be liable.
If the company is liable, then the assets of the company are divided among the debtors. If there are few or very limited assets, the debtors take pennies on the dollar if anything at all. But the equity holders owe nothing. They get nothing regardless of how much they’ve put in but they owe nothing.
If the founders take on the liability then, even when the company fails, they still owe the debts the company incurred. And, like medical bills, that can cripple someone for life.
This is the whole reason the limited liability company (LLC) was even invented. Sometimes reasonable risks need to be taken. It’s also why there’s a class of investors, known as Accredited Investors, who are deemed eligible by the SEC to invest in these kinds of companies, because they can reasonably withstand the risks involved.
An Accredited Investor is someone with personal wealth worth over $1m not including their homes or with an annual income above a certain level. All of the sharks, obviously, qualify for this class.
But they’re also not stupid.
If they see a business on the brink, it may be that they’re asking for additional terms off camera in which the business owners are to assume the liabilities of the company. And that’s good for no one.
It’s good for no one because companies that fail make investors consider their investments more. Yes, it makes investment money a little more scarce but it also makes investors aware of the risks. This is why a lot of people had an issue with the idea of “too big to fail” in the last recession. If investors in failing banks didn’t lose any value, what’s to stop them and the banks they invested in from making the same mistakes again?
It’s also bad for the owners because they might be the kind of people who fail once, twice, even three times but, on the fourth try, they make millions and employ hundreds if not thousands of people. This is what we want as an economy, people to try and try again until they’re successful and able to employ others as well.
In fact, statistics show that those who have failed at least once are more likely to succeed in their next businesses than people who have never failed.
But burdening these people with debts from their companies almost ensures that they’ll never create another one. For one, they will never be able to afford it. And, even if they are, they may never be willing to take the risk again because how does the average middle class person dig themselves out of $500k to $1m in debt?
I’m really unhappy about the number of “on the brink” companies that have been coming in so far and, as cold as this sounds, I hope that the majority of them don’t get deals. I think the founders will either dig their way out or the businesses will fail. But I think almost every founder will go on to do something else, something that may succeed the next time and without possible terms that might leave them crippled to do so.