Here are a few simple concepts re: Venture Debt. See our other articles to learn more about Venture Debt.
- Venture debt is mostly non-dilutive, but lenders often require an equity kicker in the form of warrants or co-investment rights.
- Most institutional venture lenders require at least one preferred round of equity financing before providing a venture debt facility (see when is the right time to raise Venture Debt).
- Venture debt facilities can take different forms, including single term loans, delayed draw term loans, and borrowing base facilities.
- Lenders usually receive a first-priority security interest in all company assets, often excluding intellectual property.
- Venture debt financing requires various consents and approvals, such as board and shareholder consent, and subordination of existing debt.
- Venture debt agreements contain restrictive covenants and reporting obligations, limiting a company’s ability to engage in certain activities without lender consent.
- Lenders may use financial covenants or material adverse change (MAC) clauses to track a company’s performance in line with its business plan.
- Companies must have cash flow or other sources of funds to service venture debt, paying principal, interest, fees, and expenses.
- For early-stage, pre-revenue companies, lenders may request a personal guarantee from the founders, with varying levels of commitment and liability.
- Lenders may require third-party items, such as moving depositary accounts, tri-party agreements, landlord agreements, and insurance endorsements. This became very important with the collapse of SVB (learn more about .