DEBT IS GOOD

[From an email I sent to Curie & Co.]

So there was a meeting tonight where some guys from a law firm came to tell us all about working on the law side of private equity, and I learned that, by the logic of private equity, I totally rock. Why? Because I have a LOT of debt.

Here's how it works (Karen can skip this lesson, I'm sure):

In the private equity world, cash is BAD and debt -- or excuse me: "leverage" -- is good.

This is because you can get a higher rate of return on debt.

The logic is brilliant:

If I pay $200,000 in law school expenses with my own cash, and when I graduate am worth $250,000, then I have a net gain of $50,000 beyond what I paid out of pocket, giving me a rate of return of 25% on my cash investment.

If, on the other hand, I pay $50,000 in law school expenses with my own cash, and leverage the $150,000 from a bank with an interest rate of 10% upon graduation, and (like in the last scenario) I'm worth $250,000 when I graduate, then I have to give the bank $165,000 and would have a net gain of $35,000 on what I paid out of pocket, but now my rate of return is 70% on that cash investment. Not only did I get more for my cash investment, but while I was using debt to pay for school I could use my still-free cash to get utility in OTHER ways.

Private equity is the new Secret. (Oprah joke)

VC