Venture Debt

Venture debt is lending to companies that are backed by institutional equity investors but not yet profitable. Lenders underwrite the quality of the equity sponsors and the company's cash position rather than conventional cash-flow coverage.

Loans typically carry interest, a defined term, and warrants giving the lender a small equity participation as compensation for the elevated risk.

Most commonly raised shortly after an equity round, to extend runway and reach the next milestone without selling more equity. It is also used to fund equipment, acquisitions, or working capital where the cost of equity would be prohibitive.

The general rule is that venture debt complements equity rather than replacing it — lenders want to see a recent round and a credible path to the next.

• Interest rate and term
• Warrant coverage — equity granted to the lender, expressed as a percentage of loan value
• Financial covenants — minimum cash, revenue, or performance thresholds
• Material adverse change clause
• Security — often a lien over company assets including IP

• Covenant breaches can trigger default at the worst possible time
• Security over assets, including IP, constrains future options
• Debt service consumes cash that would otherwise fund growth
• Senior claim reduces recovery for equity holders in a downside scenario