Venture Debt Term Loans

Venture term loans are for companies that want additional capital with more flexibility than traditional debt and typically have already raised venture capital. These are paid back with interest on a set schedule over a period of time. This can be a great option to reduce dilution from raising only equity.

Primary use cases for venture debt are to extend the timeline to the next equity raise, reach cash flow positive, or serve as a financial safety net.

Great for —

  • Predictability of cost and payments for the company. 

  • 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 if the lender is asking for multiple percentage points of the business. Some lenders will try to have triggers to have more Warrants issued to them based on milestones. 

  • Some lenders may want to be able to exercise warrants before an exit of a business. It will be important to understand what repercussions this could have on the business. If a lender is selling shares of the business before exit, some investors may see this as a bad sign if they interpret it as the lender has lost confidence in the business.

  • While in most cases there are no covenants attached to the loan, most loans will either have an “Investor Abandonment” or a “Material Adverse Change” clause in the structures. “Investor Abandonment” will let a lender make the company payback the loan in the case that the investors or board members walk away from the business. It will be important that the company trust the investors more than the lender in this case. A “Material Adverse Change” is more difficult to define but a lender may try to make this case if the business sees hardships. In this case, the company will want to make sure they have a good understanding of how the lender reacts and supports businesses in hard times.

 

Typical Terms

Funding Size
$100,000 - $50,000,000
Interest Rate
5 - 30%
Warrant Amount
.1% - 5% of Ownership
Loan Term
2 - 4 Years
Upfront Fees
1-2% of Loan Amount

 

Glossary

Warrants
This gives the lender the right to purchase company stock at a specific price and by a specific date directly from the company. This does not represent immediate ownership of stock. 

Investor Abandonment
The lender can ask for full repayment if the Company’s investors no longer support the company.

Material Adverse Change
The lender can ask for full repayment if it determines a material deterioration in the business has occurred and may impact repayment.