# Default alive or default dead

> Whether Northwind reaches profit on the cash it has: alive as it stands, and a hiring decision that turns on one growth rate.

Source: https://lopifi.com/learn/default-alive-or-default-dead
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What does default alive or default dead mean for a startup?** Whether Northwind reaches profit on the cash it has: alive as it stands, and a hiring decision that turns on one growth rate.

Runway tells you when the cash runs out if nothing changes. [Default alive](https://lopifi.com/md/glossary/default-alive) asks the better question: if costs stay where they are and revenue keeps growing at its recent rate, does the company reach profit before the cash runs out? If yes, it's default alive. If no, it's default dead, and its runway ends in a fundraise it hasn't yet won.

> “Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left?”

— [Paul Graham, “Default Alive or Default Dead?” (October 2015)](https://paulgraham.com/aord.html), The origin of default alive — a startup convention, not a standard

Northwind, as it stands, is the easy case. September's revenue of $31,500 less [cost of revenue](https://lopifi.com/md/glossary/cost-of-revenue) and operating expenses left a profit of $1,747.40. It's profitable in month 0, so it's default alive before the test starts. Be careful, though: a profit isn't cash. September's operations still used $647.40, because customers owed money and stock was on the shelf. The alive test ignores [working capital](https://lopifi.com/md/glossary/working-capital) on purpose, so it's a first screen, not a cash forecast.

## The decision that changes the answer

The founders are weighing 2 hires, a salesperson and a warehouse lead, at $5,000 a month gross each. Fully loaded with the employer's payroll tax (7.6%, read off September's payroll), that's $10,765 a month. September's profit becomes a loss of $9,017.60. Is Northwind still alive? It depends entirely on growth.

|  | At 5% a month | At 10% a month |
| --- | --- | --- |
| Fixed costs a month, with the hires | 23,517.60 | 23,517.60 |
| First profitable month | Never: the cash runs out first | March 2027 |
| Month the cash goes below zero | March 2027 | — |
| Lowest cash on the way | (2,193.88) | 15,140.95 |
| Verdict | Default dead | Default alive |

The same company, the same hires, two growth rates. Costs held flat; cost of revenue moves with sales.

| Month | Revenue | Cost of revenue | Profit (loss) | Cash at month end |
| --- | --- | --- | --- | --- |
| October | 33,075 | 17,850 | (8,292.60) | 27,060 |
| November | 34,728.75 | 18,742.50 | (7,531.35) | 19,528.65 |
| December | 36,465.19 | 19,679.63 | (6,732.04) | 12,796.61 |
| January 2027 | 38,288.45 | 20,663.61 | (5,892.76) | 6,903.85 |
| February 2027 | 40,202.87 | 21,696.79 | (5,011.52) | 1,892.33 |
| March 2027 | 42,213.01 | 22,781.62 | (4,086.21) | (2,193.88) |

Month by month at 5% growth, with the hires.

*[Figure: burn runway]*

With the hires, October at plan growth: $41,367.60 of costs against $33,075 of sales.

> **Default alive isn't a mood. It's a calculation from three inputs (cash, costs and growth), and the one founders guess at is growth.**

**Wrong:** "Runway is 4.3 months on the new burn, so the hires are safe for now."

**Right:** Default dead at 5% growth: cash runs out in March 2027.
Alive at 10%. Hire when growth proves the faster rate.

Runway on today's burn assumes revenue never grows. The alive test assumes it keeps growing as it has. Use both, labeled; the gap between them is how much the plan leans on growth.

**Cut or delay costs**
- Pro: Fully in the founders' control
- Pro: Works immediately
- Con: Can slow the growth that would have fixed the problem
- Best for: When growth is unproven

**Grow faster**
- Pro: Fixes the problem without shrinking the company
- Con: Not in anyone's control; it's the input most likely to be optimistic
- Best for: When there's real evidence growth is speeding up

**Raise money**
- Pro: Buys time to reach profit at the current growth rate
- Con: Takes months, isn't certain, and dilutes the founders
- Con: Raising while default dead is raising from weakness
- Best for: When the business works and needs time, not a new model

The three ways out of default dead.

Raising, worked on Northwind: [how a raise changes runway](https://lopifi.com/md/learn/how-a-raise-changes-runway).

**Use case — Before you sign the offer letter.** Run the test before every commitment that raises fixed costs: a hire, a lease, an annual contract. If the commitment turns the company from alive to dead at the growth rate you actually have, it needs either proof of faster growth or the money to bridge the gap.

## Where this lesson's rules come from

- [Paul Graham, “Default Alive or Default Dead?” (October 2015)](https://paulgraham.com/aord.html) — The origin of default alive — a startup convention, not a standard (reference)
- [Wikipedia, “Burn rate”](https://en.wikipedia.org/wiki/Burn_rate) — Burn rate — background (reference)

## Read further

- https://lopifi.com/md/calculators/contribution-margin
- https://lopifi.com/md/calculators/operating-margin
- https://lopifi.com/md/startups/burn-rate-and-runway
- https://lopifi.com/md/accounting/runway
- https://lopifi.com/md/accounting/burn-rate
- https://lopifi.com/md/docs/domain/10-metrics

- **Track:** [Finance](https://lopifi.com/md/learn/finance)
- **Lesson:** Lesson 2 of 8 — 10 min
- **Terms taught:** [Default alive](https://lopifi.com/md/glossary/default-alive), [Runway](https://lopifi.com/md/glossary/runway), [Net burn](https://lopifi.com/md/glossary/net-burn), [Cost of revenue](https://lopifi.com/md/glossary/cost-of-revenue), [Working capital](https://lopifi.com/md/glossary/working-capital), [Contribution margin](https://lopifi.com/md/glossary/contribution-margin)
- **Previous:** [Run rate and one-offs, Finance · Lesson 1](https://lopifi.com/md/learn/how-to-calculate-burn-rate-and-runway/run-rate-and-one-offs)
- **Next:** [The 13-week cash flow, Finance · Lesson 3](https://lopifi.com/md/learn/13-week-cash-flow-forecast)
- **The course:** https://lopifi.com/md/learn