Personal Guarantees . . .
are promises made by an entrepreneur or founder that
obligate him personally to repay debts defaulted upon by his
Entrepreneurs who incorporate their companies to avoid
becoming personally liable for company debts are often disappointed
when they look for financing. This is because many lenders and lessors
require personal guarantees as a condition to lending or leasing to
small private companies. Even some venture financings, those that
include a substantial amount of debt, require personal guarantees for
the loan portion of the funding. These guarantees require the
entrepreneurs to pay off the loans if their companies default.
Not all personal guarantees are equal, however.
Entrepreneurs should be aware of the concessions lenders sometimes
make so that they can negotiate to reduce their personal exposure
under their guarantees. For example, when two or more company officers
are asked to guarantee a single loan each officer may be liable to
repay the entire amount of the loan or just a pro rata portion of it.
It depends on how the guarantee is worded. Also, the availability of
company assets to secure part of a loan can sometimes be used to limit
a guarantee to a portion of the dollar value of the loan. On long-term
loans, provisions can sometimes be negotiated that cancel the
guarantee upon the happening of some future event, such as the passage
of time, the infusion of new equity into the company, or the payment
of a portion of the loan.
Personal guarantees are not required in equity
financings. Many venture financings, however, are made up of debt and
equity. As a result, venture capitalists that fund companies with both
debt and equity sometimes ask management to guarantee the debt portion
of the financing. A personal guarantee in such a situation, however,
may not be appropriate. If the funding is essentially a debt financing
with attached stock rights given as a bonus, a guarantee may be
unavoidable. When a financing is essentially an investment of equity
with a portion characterized as debt to "sweeten the deal"
for the investor, management is justified in objecting to guaranteeing
the "debt" portion of what is really an equity financing.
See: Buy-Sell Agreements,