Netflix Company: Examine If the firm has borrowed money, either form banks or in the form of bonds, evaluate the potential for conflicts of interest between the equity investors and lenders and how it is managed

Equity Shareholders are the owners of the company while bondholders are the creditors of the company. Both have different relationship with the company. Equity investors are the risk takers and they are interested in dividends and increase in the value of their shares. Bondholders are interested in their returns and redemption of bonds at premium or at par after certain period of time. Equity investors provide their money to company for risky ventures. More risk more profit. So they are interested in higher amount of dividend. They enjoy voting rights. But when a company wants to obtain funds from banks or by issuing bonds then these lenders put certain restrictions in the form of covenants on the company. These covenants restricts company from entering into a risky venture. So these lenders try to control the company indirectly without having any voting rights. Here conflict arises in both the parties. Bondholders put restrictions that if company enters into risky ventures then it has to pay higher rate of interest which will increase the cost of capital. These restrictions can negatively effect the shareholders. Because they are the owners and risk takers and company is following the guidelines issued by the lenders. They think that bondholders or banks have preference in the payment of interest and more over at the time of liquidation they will again get the preference over payment. If the bonds are redeemable in nature then after certain period of time they will take back their money . While equity investors are always at risk. Dividend is paid to them at the last and at the time of liquidation they have to suffer all the losses. On the other hand bondholders or lenders think that after taking fixed interest from the company whatever huge amount is left is given to the equity investors. In the growth phase all the profits belong to equity while they will get only fixed rate of interest whether company is in introduction stage, growth stage or at maturity or declining stage.

How to solve the conflict:

If company wants to reduce these conflicts then it must issue convertible bonds which after certain period of time will be converted into equity shares. Then bondholders will think differently , both like bondholders and shareholders. And when company takes loan from bank then it must issue equity shares to them as a security. Bu this way they will become institutional investor and think from the both sides.