Investment Safety - Part 2

Okay, I'd better clarify.

Yes, when a company fails, creditors will almost always get a greater percentage of their investment repaid out of the proceeds of liquidation than will equity holders.

I do wonder what motivates companies to take on capital investment and investors to invest in companies.

I think companies take on capital investment to enable them to realize business opportunities they have identified. It often takes capital today to enable earnings tomorrow.

So the company is taking on an obligation to combine its business acumen and productive ability with investors' capital to realize its goal.

The investors, meanwhile, commit to the company to help it realize its goal with the belief that their capital commitment will earn a reward arising out of the successful achievement of the goal.

So both the investors and the company are motivated by achievement of a common goal.

I then suggest that investors and companies alike work to arrive at a capitalization solution that does not threaten to turn the investment into a non-enabler, or worse yet, a disabler.

How can non-enabling and disabling happen?

Debt servicing can hurry a company along its way to failure when its best laid plans don't turn out as quickly as hoped because of errors in execution or slumping demand for the company's produce because of bad weather or a generally slumping economy.

Now the company finds itself required to keep digging when it is already in a hole.

Equity participation does not threaten the company unless the equity owners decide that the company team doesn't deserve their trust and they replace them. This is a dangerous situation as the vision may not be shared by the new team. The team may be "allergic" to the old vision thinking they maintain their positions by avoiding anything that had anything to do with the past.

But that's not the real point as far as the investors are concerned. Should the company fail no matter the best efforts of all concerned, the investors are probably not going to achieve either goal. The produce will not be delivered and they will not earn a reward for their involvement and they may even lose part or all of their capital.

We then need to work harder to come up with solutions that enable the goal of the desired produce to be achieved even though the first company fails in the execution. That failure should not have been a direct outcome of the capital investment.

Solutions are out there and we shouldn't need Scully and Mulder (of X-Files) to find that "truth" that's out there.

Mike