Organizational Debt: The toll tradeoffs make on your ability to scale
What is organizational debt?
Organizational debt is the accumulated difference between the ideal choice and what leaders had to do in order for the organization's people, process, product (or service), and the supporting systems to survive and advance.
Organizational debt sounds like something related to your company finances but it is about so much more than just money.
If you don't know about it, there's a good chance it's working against your scaling goals.
The good news is that once you know what it is, how it grows, and how to manage it, you'll be in a better spot to decide what steps to take. Just like any debt, structuring a plan to address it is key to unlocking a more stable future.
A way to think about organizational debt
Imagine you've got a friend with a credit card who has an unlimited available balance. They use it wherever they like. It's secured by nothing more than their good name.
Now, imagine the bank never sends them a statement. Instead, the bank just starts taking a little money out of their account each month. Not a lot. Just enough to cover the minimum payment. All while the original charge sits there happily adding to the daily compounded interest rate.
They use that card for everything from gas in the car to flights and even that big home improvement project because, well, points–right? You ask them how they're paying for all this stuff and they say "I've got a great credit card!"
You're starting to get a little worried at this point and you say "You know you have to pay for those things and the compounding interest, right?"
Organizational debt is like using a credit card but never having a statement that shows how much you owe or the way interest is piling up.
Organizational debt comes from tradeoffs a founder, owner, or executive makes or the organization to survive and advance.
In the early stages of almost every business, there are more demands than resources. We have to figure out how to stretch limited time and money to cover a whole lot of need. We make decisions about what's good enough for now and what we'll fix later.
How often have you heard someone (or even yourself) say: We'll cross that bridge when we get there.
Like our friend with the bank that never sends a statement, I have (so far) never met a founder or business leader who can show me a list of all the tradeoffs they've ever made and their plan to address the interest they're carrying.
They made the best decisions they could at the time. In fact, those choices are exactly why they're still in business.
The problem?
Uncured organizational debt just grew into a weight that was too heavy to keep pushing up the growth curve.
How does organizational debt build?
Organizational debt can show up everywhere - if you know where to look.
Organizational debt is invisible until something breaks.
Two examples illustrate the pattern:
Equity as payment for services
Hiring a version of "hungry, humble, and smart"
There's a risk in highlighting examples because it's easy to dismiss them since you or I didn't make that particular tradeoff. I'll trust that you'll understand these might help you reflect on patterns you've seen and apply the insight to your situation.
Equity as payment for services
The situation
A few weeks ago, I heard about a customer who offered someone equity (an ownership position) in exchange for a lower rate on their service. On the surface, it's a completely logical trade. This is a contract with expert who's rate is higher than they felt they could afford. It's a critical project and, done right, has the power to catapult the organization. How can they close the gap?
Why is it organizational debt?
The customer is offering a long-term slice of ownership in their organization in exchange for a short-term gain. It feels like a good thing. After all, shouldn't a key vendor or employee want the leverage if they believe their service will have the results they claim?
Here's why it's debt. That founder will now be responsible to provide documentation to their new "co-owner" every year for as long as that service provider is on their capitalization table. Even if the project only takes 3 months to complete, the founder will be giving updates to their owner until they reset the cap table by buying the vendor out of their position.
Adding vendors to your cap table instead of paying market rate is more expensive in the long run
t's not bad. However, when the company grows 10x and the value of that little slice of ownership now has many more zeros behind it, almost every founder who made the trade is dissatisfied with how much it cost. They nearly always talk about how there would have been a less expensive option if they had just considered the cost.
Now, multiply that by all the vendors who agreed to work for a slice of equity. The founder's ability to raise capital? It's a lot more complicated and a lot less likely. If you've ever watched an episode of Shark Tank, you've seen the sharks drop a deal like day old sushi when they find out the person pitching has a whole bunch of other investors.
Hiring a version of "hungry, humble, and smart"
The situation
A founder had multiple businesses and needed someone to run sales for one of them. This particular business seemed pretty straightforward and the sale wasn't complicated. It was an early-stage, bootstrapped business so funds were limited. Somewhere along the way, the founders heard of Patrick Lencioni's "Ideal Team Player" and adopted a version of the hungry, humble, and smart approach.
They hired a junior sales person with a great personality, lots of drive, and a solid education. That approach is usually based on the belief that a person will be motivated and able to figure things out. In early stage companies, it seems like a great fit too because founders believe they can save money with a lower base salary and reward them with a generous commission as an incentive for figuring out both the job and process.
Why is it organizational debt?
Unfortunately, the junior sales person lacked the skills and experience to drive the revenue engine on their own. At one point, the founder questioned whether or not the junior sales person was putting in their reps. The truth was that the missing system was actually a key part of the limiting factors in the sales person's success.
A new leader arrived in between the time the sales person accepted a new job and turned in their resignation. The leader had no way to retain the sales person and no resources to replace them. The leader's job became far more difficult because of the tradeoffs made earlier in the growth stage. They seemed like the right thing to do but they just accrued "interest" until the system broke.
Without the right support system, adding a person who lacks the skill to perform in the role creates more churn and work for the people who remain.
Everybody lost in this.
The employee never earned more than their base pay and spent the whole year feeling like they weren't succeeding.
The founders lost working capital and I had 60,000 fewer dollars to deploy.
The leader's job should have been focused on the strategic activities necessary to help the company move from growth to scale when, instead, they had to take on the daily sales duties.
What does every founder or owner need to know about organizational debt?
Organizational debt is invisible until something breaks. There is no end to the places organizational debt lives. It's in the:
processes we need (but never finished) to make sure the delivery team is meeting the customer's expectations;
people who didn't work out but we continue to carry them on the team because they're doing something and that's better than nothing;
high-end systems we're still paying for because we hope the business will mature to the point we can make them work;
contracts that increase our risk rather than reduce it because we cribbed it or had AI write it instead of having an attorney review it; and
so many other places.
Unfortunately, the tradeoffs we made earlier require us to make more tradeoffs in the future. You can carry debt indefinitely but you can't keep adding to it if your goal is to scale. The only way to break the cycle is to make the debt visible.
Why does settling organizational debt matter?
Let's go back to our friend with the unlimited credit who never got a statement. One day, they decide to buy a new house. It's the perfect house. The right style, location, and even a fantastic price. A massive upgrade.
They head the bank for a loan. They're confident they'll be approved until the loan officer says the system rejected their application. Our friend learned too late how much their debt cost them as they watch their dream house sell to someone else.
It's a little absurd, isn't it? Of course this would never happen. The bank always sends a statement. They just didn't look at it.
Organizational debt doesn't come with a statement.
Few business founders or leaders keep track of organizational debt. They don't have a statement showing when and where the tradeoffs happened. But they are carrying debt and it is visible when you know where to look.
If you're feeling like the effort to move from growth to scale is getting more and more difficult, there's a good chance you're carrying organizational debt.
Need help finding and fixing organizational debt?
The team we're building at Paravelle has seen this before.
In companies from the top down and the bottom up.
In large corporations, start-ups, and everything in between.
We've felt that very weight ourselves.
It's why we come alongside founders to reduce the stress that sits squarely on their shoulders.
We help founders and CEOs identify the debt, decide what matters most, and work alongside the team to build a stronger cadence. The result is more consistent execution, visible progress, reclaimed leadership capacity, and less need for you to be everywhere at once.
Why not contact us now and see how we can help?
