Venture Debt Term Loans
How it Works —
Lenders provide you with a percentage of the Venture Capital that you raised in your last round of funding. This is paid back with added interest over an agreed-upon period of time. Warrants are also given to the financier as compensation for the risk.
Example —
The lender provides you with $1M in venture debt at 10% interest and warrants to purchase 1% of shares in your business. The debt amount is 25% of the $4M round of funding that you recently raised at 20% dilution. You make monthly payments to pay back the venture debt plus interest for 3 years.
You Might Be A Fit If —
- You have taken a Venture Capital investment.
- You have enough cash to fund operations for the next couple of months.
- Your business is comfortable with committing to make fixed payments to pay back financing.
GREAT FOR —
Extend the timeline before the next equity raise to achieve more progress, a transition to cash flow positive, or reach other milestones.
Alternative to traditional debt with added flexibility and an alternative to equity with much less dilution.
Many structures have an interest only period attached that can delay repayment of the loan.
THINGS TO WATCH OUT FOR —
Warrants can be costly to the business and could require percentage points of the business.
Evaluate the relative cost if you raised the same funding amount in the last Venture Capital round.
Avoid triggers that offer more Warrants based on milestones.
Lenders may ask for the ability to exercise warrants before an exit of a business. Some investors may interpret this as lost confidence in the business.
Work with a lawyer that has experience with warrants to properly navigate the risks.
Venture Debt can include a “Material Adverse Change” clause that allows a lender the right to not fund the loan or ask the company for immediate repayment if the business sees significant hardships.
Do some diligence on the lender to understand how they might react or how they have supported businesses in hard times.
