Glossary - Tranche
In finance, a tranche refers to a portion, segment, or slice of financial instruments such as loans, bonds, or mortgage-backed securities, which are grouped together to sell to investors. Each tranche has its own level of risk, maturity, and yield, structured to cater to the diverse needs of investors. In venture capital, tranche financing involves the phased disbursement of investment capital to a company based on the achievement of predetermined milestones or performance targets.
Also known as
- Sliced Investing
- Phased Funding
Use cases examples
- Venture Capital Financing Agreement: The company shall receive the investment in three tranches, subject to achieving the mutually agreed milestones outlined in Schedule A.
- Mortgage-Backed Securities Prospectus: This issuance is divided into senior and junior tranches, with the senior tranches receiving payments before the junior tranches.
Considerations for investors
- Investors need to thoroughly assess the risk and return profile of each tranche to align with their investment strategy and risk tolerance.
- Monitoring the progress of the company or asset against the milestones or performance targets associated with each tranche is crucial for managing the investment.
Considerations for founders
- Understanding the conditions and implications of tranche-based funding is crucial, as failing to meet the agreed milestones could result in delayed funding or adjustments to the terms.
- The negotiation of milestones should be realistic and aligned with the company's projected growth and development plans to ensure each tranche can be received as planned.
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