How does Venture Debt work?
Venture debt (or growth debt) is a lending arrangement typically offered by specialist funds to venture capital-backed but still loss-making high growth technology, life sciences, or similar businesses. Loan providers effectively agree to largely cap their returns (hence reducing the dilution vis-a-vis venture capital financing) but in return require to be the first in line (taking a senior secured position) in the repayments waterfall. Minimum business size and the facility requirements typically apply (e.g. loans are likely to be 1m+, whereas revenue-based financing can be from 10k+).
Typical venture debt arrangement consists of:
3-year monthly amortising (can include an interest-only period in the beginning) senior secured term loan, with a fixed interest rate
Likely would include negative covenants and sometimes also financial covenants
A warrant agreement, giving the debt provider the right to acquire a small portion of shares at the current valuation, exercisable at a liquidity event (a sale of the business or an IPO). This gives away some equity upside but reduces the cash costs of a loan
Upfront and back-end fees