Glossary - Venture Debt
Venture debt refers to a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Unlike traditional bank loans, venture debt is typically secured by the assets of the company and may include warrants or other equity-related instruments, allowing lenders to participate in the company's success. It is often used as a complementary method to equity financing, providing companies with the capital they need without diluting the ownership stakes of existing shareholders.
Also known as
- Venture lending
- Growth debt
- Startup debt
Use cases examples
- Term Sheet: The venture debt financing will be provided according to the terms outlined in this Term Sheet, including interest rate, maturity date, and covenants.
- Loan Agreement: Pursuant to the Loan Agreement, the lender will provide a venture loan up to $2 million to the company, secured by the company's assets and accompanied by warrants to purchase equity at a predetermined strike price.
Considerations for investors
- Investors should assess the company's ability to service the venture debt, considering its current financial health and projected revenues, to mitigate the risk of financial distress.
- The inclusion of warrants in venture debt deals can offer upside potential to lenders, but investors should carefully negotiate these terms to balance risk and reward.
Considerations for founders
- Venture debt can provide necessary capital without significant dilution of equity, but it increases the company's liabilities and requires regular interest payments.
- Founders should carefully evaluate the terms of venture debt, such as interest rates, covenants, and repayment schedules, to ensure alignment with their business's growth plans and cash flow projections.
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