There is a very popular short story about Elon Musk that goes (more or less) like this:
Elon Musk made $180M when PayPal was acquired in 2002.
He put $100M in SpaceX, $70M in Tesla, and $10M in Solar City.
He borrowed money for rent.
Depending on what social media platform your read it on, there might be a few variations, but the main points are always the same: Elon Musk made a huge amount of money after his PayPal exit and he put it ALL in his future entrepreneurial ventures, to the extent he had to borrow money for rent.
While this is technically true, it is also inaccurate. And it’s inaccurate in a toxic way, especially for aspiring entrepreneurs, who are all about the “hustle”, about believing in their own dream and make it “one day”.
Your Idea Of “Rent” Might Be Very Different Than Elon Musk’s
When you read this very short piece, you’re immediately inclined to think: “wow, if you go all in, if you believe in your dream that much that you’re even borrowing money for rent, then you will hit it big”. After all, rent is something that you can’t really avoid, you have to pay it in order to function. So if Elon himself borrowed money for something that basic, that unavoidable, it means he showed an enormous amount of trust in his own future, and it is this behavior that fueled his fantastic success.
Only it’s not like that.
Elon didn’t borrow your regular 500 EUR of rent, or whatever you pay – although that story, because it’s that short and incomplete, may make you believe so. Elon borrowed millions, and he did this by using his existing shares as collateral. Which means a significant part of his highly successful ventures is now a liability. If he doesn’t pay back the loan, banks may take ownership of those shares and sell them to cover their loss.
Needless to say, this will immediately spiral down the price.
There is a very thorough piece explaining in more detail the risky bet he’s making by taking loans against his shares, and you can read it here, if you’re curious.
I will just briefly mention another reason for this behavior, which is a very subtle tax nuance. Rich people are (usually) borrowing money to avoid paying tax on capital gains. The mainstream train of thought when it comes to shares is that you make money by selling them. That’s obviously true, only you have to pay some tax on that sale, and when we’re talking about hundreds of millions worth of shares, that tax can hurt. So that’s why a lot of rich people prefer to take loans against their shares to support their luxurious lifestyle, because you don’t pay tax on borrowed money, it’s not technically your money. You pay, of course, interest, but that’s way more manageable than tax. You also run the risk of the loan being called off, but this happens only if you’re not paying. And even if it comes to that, banks will be more than happy to lend you even more money to cover up for your previous loan, as long as your collateral (shares, in this case) is increasing / appreciating.
Don’t Believe Everything You Read
The reason I’m writing about this is that many aspiring entrepreneurs are falling for this type of motivational garbage. It’s way easy to read and fall off for a few lines of text (that are sounding really nice, I admit this) instead of doing thorough research and understand the real mechanics of the game.
Many young people are literally putting their little savings in their future endeavors, and they borrow monthly their 500 EUR for rent, believing they’re on the right path. They’re not. They’re deluding themselves. Their chances to “make it big” with that little investment are really small to begin with, and second, when the shit hits the fan, they’re left not only without a business, but also with a loan that they have to pay back.
So, please, pretty please, with sugar on top: do your own research.
That’s not to say you don’t have to pursue your dream. On the contrary, by all means, go for it. But do it in a clever way, assess risks and increase your odds for success. Just because Elon did something, it doesn’t automatically mean it’s going to work for you too, especially if you don’t really understand what money Elon actually borrowed.