Good question.

In the old days, banks took the risk of lending money on themselves and ensured that borrowers would be able to pay it back over time. The recent fad for the securitization of risk meant that they can lend to any Tom, Dick or Harriet, then package up the debts into large parcels of small slices from many borrowers, and sell them onto other banks and finance houses.

These financial instruments, for example : collateralized debt obligations (CDOs), are the financial equivalent of supermarket sausages — nobody knows what’s in them, and many prefer not to.

How will the demise of CDOs affect the small business borrower? In the sense that many startups are categorized as sub-prime, since they don’t have a year or three’s accounts to back up their case, the situation is probably being reassessed.

The policy of reckless securitization is starting to be reversed, according to many accounts. If you have not been caught up in the debt trap created by the sub-prime fiasco, you may just be a better risk than the trailer-park poor, especially as many governments give tax breaks to banks which lend to small businesses.

Let us keep our fingers crossed.

If a venture capitalist offers you a certain sum of money in exchange for a shareholding in your startup, what are the rules governing these deals and how much of your business should you part with?

Paul Graham has done a pretty good analysis of this perennial teaser for new business owners. The answer apparently is :

1/(1 - n)

Whenever you’re trading stock in your company for anything … the test for whether to do it is the same. You should give up n percent of your company if what you trade it for improves your average outcome enough that the (100 - n) percent you have left is worth more than the whole company was before. For example, if an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company’s average outcome, you’re net ahead. You have half as big a share of something worth more than twice as much. In the general case, if n is the fraction of the company you’re giving up, the deal is a good one if it makes the company worth more than 1/(1 - n).

If you were in this scenario, you would already have gone through a lot of hoops to get there. You should bear in mind from the outset that a VC company like Sequoia gets about 6000 business plans a year and funds around 20 of them.

Face it, you’re going to have to be good to get the cash, so you are entitled to drive a hard bargain. According to Graham, Sequoia will allow you to do so.

Read Paul Graham’s account of VC funding options in full.