Default alive or default dead: the calculation to run every month

By Meet Patel · 2026-10-03 · 6 min read

In October 2015, Paul Graham wrote that half the founders he talked to did not know whether they were default alive or default dead. The question takes one sentence to ask: 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? If yes, the company is default alive. If no, it is default dead, and everything it does next should be judged against that fact.

The inputs are easy to recite: the cash balance and the monthly revenue. The answer is harder: the month in which the plan crosses into profit, and how much cash it will have used by then. The gap between knowing the inputs and knowing the answer is what this post is about, and the calculation fits on one page.

What the question assumes

The definition carries two assumptions, and both are deliberate. Expenses stay where they are today, so a hire you have not made yet does not count as part of a plan to survive. Revenue keeps growing at the rate it has grown over the last several months, so a hoped-for acceleration does not count either. The test asks what happens if you change nothing, which is why it is useful: it separates the company you are running from the company you intend to run.

Graham calls the dangerous combination the fatal pinch: a company that is default dead, growing slowly, and without enough time left to fix either. The pinch rarely arrives suddenly. It builds over months in which nobody ran the calculation, and by the time it is visible the options have narrowed to the painful ones.

The monthly calculation

You need four numbers, all read from your own books on the same day each month:

1. Cash in the bank today.
2. Monthly expenses (E): everything that leaves the account, including salaries, tools, tax and the founders' own pay.
3. Monthly revenue (R), measured as cash collected, with invoices sent but unpaid left out.
4. Monthly growth rate (g) of that revenue, averaged over the last three to six months.

Then project revenue forward one month at a time, multiplying by (1 + g) each month, until it reaches E. That month is your break-even. Add up the shortfall between E and revenue in every month before it. If the total is below your cash, you are default alive. If it is above, you are default dead, and the difference is the amount of money, in dollars, that your current trajectory is missing. Graham's essay points to a calculator built by Trevor Blackwell for this, and a ten-row spreadsheet does the same job.

Here is a worked example with illustrative figures. Take a 10-person software company with $250,000 in the bank, $55,000 of monthly expenses and $30,000 of monthly revenue.

Scenario A: revenue grows 8% a month. Revenue passes $55,000 in month 8 (about $55,500). The shortfalls in months 1 to 7 are roughly $22,600, $20,000, $17,200, $14,200, $10,900, $7,400 and $3,600, which sum to about $95,900. The company needs under $100,000 of its $250,000 and is comfortably default alive.

Scenario B: revenue grows 3% a month. Revenue does not reach $55,000 until month 21. The cumulative shortfall peaks at about $269,700, which is $19,700 more than the cash available, and the account hits zero around month 15. The same company, with the same cash and the same costs, is default dead because it grows more slowly.

Compare the two growth rates to a yearly figure. Eight percent a month compounds to about 2.5 times in a year, and 3% a month to about 1.4 times. Graham notes that with steep revenue growth, say over 5x a year, you can start to count on investors being interested even without profit. Five times a year is roughly 14% a month, so neither scenario earns that assumption, and a plan that quietly depends on a fundraise has to say so in writing.

What changes the answer

Three variables move the result, and they differ in how quickly you can move them.

Expenses. This is the fastest lever. In Scenario B, cut monthly expenses from $55,000 to $50,000 and break-even arrives in month 18 instead of 21, with a cumulative shortfall of about $177,600. A $5,000 reduction converts default dead into default alive with roughly $72,000 to spare. That one input outweighs most of the changes a founder would otherwise spend a quarter chasing.

Growth rate. This is the most powerful lever and the slowest to move. Graham's advice for a company that is default dead is to fix the product, because hiring people is rarely the way to fix that and more often makes it harder. He names hiring too fast as the biggest killer of startups that raise money, and he points out that Airbnb waited four months after raising money at the end of Y Combinator before hiring its first employee. The calculation shows why in dollars: every salary added to Scenario B moves break-even further out and raises the peak shortfall. For the long-run side of that trade, see The Hiring Paradox.

Cash. Raising money extends the runway and leaves the trajectory underneath untouched. A company that is default dead before a raise is default dead after one, with more months to find out. The calculation tells you which kind of raise you are doing: one that funds a plan that already works, or one that buys time to find a plan.

Where the calculation lies to you

The arithmetic is simple and the inputs are easy to flatter. Four places to check:

• The growth window. Use three to six months of growth, and leave out your best recent month. A launch spike or a single large contract can make g look like 15% when the underlying rate is 4%.
• Revenue that is not cash. Annual contracts billed upfront make one month look rich and the following eleven look poor. Convert to monthly cash received, or model each invoice in the month it lands.
• Churn hidden inside growth. If you add $4,000 of new monthly revenue and lose $2,500 to cancellations, growth is $1,500. Use net figures.
• Compounding that cannot last. Eight percent a month for two years would multiply revenue by about 6.3. Run a second case with growth cut in half and see whether the answer survives.

The second case is the one I would insist on. If the plan is default alive at your measured growth rate and default dead at half of it, you know your margin for error. You can then decide how much of that margin you are willing to rely on, which is a better question than whether the first number looks good.

A rule for the monthly review

Put the calculation on the calendar for the first week of every month, next to the close. Record the same five lines each time so that months can be compared:

• Cash today and monthly expenses (E).
• Monthly revenue (R) and trailing growth rate (g), with the window used.
• Break-even month and cumulative shortfall at that growth rate.
• The same two figures at half the growth rate.
• Status, and for a default dead company, the dollar gap, the one lever you will pull and the date you will pull it.

A default alive company still has decisions to make, and the calculation tells you how much slack they have. If the status flips from alive to dead after a hire, a price cut or a slow quarter, that flip is information delivered months before the bank balance would have delivered it. When a trajectory is wrong, holding or folding is a decision you want to make with runway left.

The principle I take from it is that survival is a computed property of a company. A founder who has computed it this month can still choose among options that a founder who has not will have lost by the time they look.

Written by Meet Patel — startup operator and growth strategist in Dubai.

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