This Lease Might Explode Any Minute

Mike Caringi, owner of a small New Jersey business that sells pumps, found himself facing a gut-wrenching dilemma last summer. 1,500 each month for essential telecommunications services he no longer receives and for leased equipment he claims was never installed, Or, should he stop making payments and face a potential lawsuit from the firm that financed the equipment under a ‘hell or high water lease,

Mr. Caringis company is one of several thousand small companies around the country reeling from the bankruptcy of Norvergence, a reseller of telecommunications and Internet services. At the core of the quagmire facing Mr. Caringi and others is that Norvergence succeeded in getting customers to sign separate lease and service contracts that provided its services.

200 million in lease payments to Wells Fargo Financial, CIT and 30 other leasing companies over the next five years. How can you protect your company from being victimized in a similar situation, Certainly, most transactions involving equipment leased in connection with a related service carry some degree of risk. You can reduce that risk by taking certain precautions. First, where possible, avoid leasing equipment when the equipment is proprietary to a service. The chances are that you will be stuck with the equipment if the service provider fails.

Make sure that the leased equipment has an underlying value that justifies the lease. By doing a present value calculation of all payments owed under the lease agreement and comparing that value to the fair market value of the equipment, you can see whether the lease value is reasonable. Check to see whether the equipment is used by other similar service providers, in case a switch in service becomes necessary. Finally, make sure the equipment you will be leasing can be sold in the after-market.

As a last resort, you may be able to cut your losses by having the ability to buy-out the equipment from the lessor to be resold to someone else. Perhaps, one of the best protections in signing up for a service requiring leased equipment is to thoroughly evaluate the service provider before proceeding.

Make sure the service provider is financially sound and has a long track record of providing excellent service. If possible, ask for and review financial information on the service provider. Do an Internet news search to make sure there are no troubling stories about the service provider. Be partial to services that offer equipment under contracts that tie service and use of the equipment together, such that your obligation to pay is conditioned on the service being provided.

Lastly, since these transactions always carry some risk, make sure that an abrupt interruption in the service will not have a material negative impact on your company or cause a financial hardship. George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”), responsible for LTIs marketing and financing efforts. A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing. Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies.

Now, he’s refashioning his seven-year-old venture capital firm with similar ambition, intent on making his next set of billions by revolutionizing how Silicon Valley picks (and nurtures) winning ideas. If Social Capital can get its investing formula right, Palihapitiya envisions a system in which companies can deliver nothing less than peace and prosperity for all.

“None of us are going to fix governance; it may just be beyond repair,” he says as we zip north on U.S. 101 in his Tesla Model X, headed from Social Capital’s Palo Alto headquarters to a nearby event. “But you can fix capitalism. And the reason you can fix capitalism: It is inherently numerical, and as a result, it is inherently objective.

Step one is rebuilding venture capital, capitalism’s money engine. While much of the rest of finance has become rigorously analytical, early-stage investing remains fueled by privileged networks and gut-instinct decision-making. In Palihapitiya’s view, that approach reinforces biases that disadvantage founders who exist outside of Silicon Valley’s (white, male) norms. It also handicaps startups addressing some of the thorniest issues in industries like education, healthcare, and space, which are often perceived as too risky. Palihapitiya has no such restraint. “The gnarlier, the better,” he says of the problems he wants to see companies try to tackle.



Good morning, Term Sheet readers. Let’s talk war chests. 12 billion between its global growth fund and other venture capital and growth funds in the United States and China. 250 million minimum check size required for limited partners to participate in its global growth fund. 100 billion Vision Fund. 7 billion (nearly Sequoia’s entire growth fund target amount) into just one company, Uber.