Venture debt terms
Despite billions of dollars of venture debt deals funding every year there is surprisingly little information available about these loans. I hope that these posts can help fill the gap.
One of the first, and natural, questions a CEO/CFO will ask is “what are your terms.” This is different than “send me a term sheet, I’m ready to negotiate a deal.” I always take it more as an indication that the initial call/meeting has gone well and the CEO/CFO feel comfortable enough to get an early check of how a deal might be structured.
Each company has its own needs and each financing is unique, but most venture loans have most of these general characteristics.
Closing Date. The date the legal documents are finalized, conditions precedent have been satisfied. The loan can be funded at this time.
Costs. The borrower will be responsible to pay its costs plus the legal and out of pocket costs for the lender.
Break Fee. The lender will put resources onto closing and funding a transaction. In exchange they may ask for a break fee or no-shop clause to encourage the company’s focus on the deal at hand.
Availability. Most lenders will prefer for all of the loan to be drawn at the Closing Date. Exceptions are tranched loans or delayed draws. Be careful that you don't have to pay your last principal payment on the first day of your loan.
Maturity Date. Often 36 months after the closing date. The loan will be fully repaid by this date.
Repayments. Typically 36 equal monthly payments. May have an interest-only period in the first few months which reduces the cash needed to service the loan in those early months.
Closing Fee. A fee due upon funding of the loan, often deducted from the initial advance (in order to reduce the administration of wiring funds and waiting for a fee to be wired back).
Maturity Fee. A fee due at the loan maturity, also known as an end-of-term fee.
Prepayment Fee. A penalty for repaying the loan early. May be a full interest make-whole, a discounted make-whole or a percentage of the amount drawn.
Interest Rate. The annual rate of interest to be paid to the lender. Often paid in cash, monthly. May be a fixed rate (say, 12.75%) or a floating rate (say, LIBOR + 10.50%).
Financial Covenants. If any, will be outlined here. Venture loans typically have no financial covenants.
Reporting. A list of the reporting important to the lender. Most venture lenders will want to see monthly financials, the presentations to the board of directors, the annual budget either when approved or in draft form, audited financials each year.
Observer Status. The lender may want to sit in board meetings as an observer. Lenders will rarely ask for a full board seat.
Warrants. Often expressed as a “warrant coverage” percentage of the loan amount. For example, a £2mm loan with 10% warrant coverage will give the lender the right to purchase 10% x £2mm = £0.2mm of the most recently issued pref shares for a per-share price equal to what the VCs paid for those shares.
Security and ranking. Loan typically has a full charge over all assets and ranks senior meaning that all other debt must be repaid or be fully subordinated to and postponed to (ie, repaid later than) the venture lender.
Legal Documentation. The lender will sets its standard form of legal documents. We based the CLP documents on market standards (from the Loan Market Association) and simplified them for the venture market.