Venture Debt Course Presentation

Venture Debt
Course Objectives
Explain the early enterprise lifecycle, Navigate the funding process Examine how warrants work
where venture funding fits within it, and
the most common uses of venture debt
Interpret a venture debt risk rating Analyze an example borrower and risk Walk through the important elements
model and discuss the key analysis rate them using a venture debt risk of a term sheet and discuss how a
metrics used to assess a transaction rating model venture lender may negotiate key points
Corporate Finance Institute®

Introduction
Venture Debt
Venture debt is a form of minimally-dilutive debt financing used by high-growth companies. The structure of a
venture debt loan can vary, but it is typically structured as a term loan with interest payments and warrants.
Venture debt loans are generally not asset-backed.
Venture lenders have experience with high-growth

companies.
Lenders consider themselves
investors in their portfolio
companies. Venture debt providers may be more hands-on than
a typical commercial bank.
Warrants provide equity upside.

Venture Debt
Entrepreneurs (Company) Venture Debt Lender
Wants to issue debt to a

Wants to raise venture debt when company that is bolstering its
they do not immediately need it. balance sheet, not one
desperate for liquidity.
Venture debt loans are often originated at the same time, or soon after an equity round – where creditworthiness
and bargaining power are highest.
At this time, corroborating a company’s valuation is easier since the venture capital community has just completed
considerable due diligence.
Any time a company is looking to raise capital, they should consider if venture debt is an appropriate alternative or
supplement.

Benefits of Venture Debt
Raising venture debt offers two main benefits for high growth companies:
Reduces the average cost of

capital by providing minimally Provides flexibility as it can be
dilutive funding for rapidly used as a cash cushion.
scaling companies.
This is especially true when raising This is different from traditional commercial
venture debt alongside an equity round. lending, which requires that a specific asset
Equity is the most expensive form of growth is financed and pledged as security.
capital due to its dilutive nature.

Example: Company ABC wants to raise $12MM to achieve its next growth milestones. It successfully raises $10MM
from a venture capital firm at a $50MM valuation in exchange for 20% equity.
What should ABC company do to raise the remaining $2MM?
1 Raise More Equity:
$2MM Company ABC gives

= 0.04 up an additional 4%
$50MM of equity ownership.

2 Raise Venture Debt:
Raise $2MM of venture debt with 10% warrant coverage.
$2MM x 10% Company ABC dilutes

= 0.004
equity by 0.4%.
$50MM

1 Raise More Equity: 2 Raise Venture Debt:
More Expensive Cheaper

Early-Stage Enterprise Lifecycle
Technology Product Market & Sales Revenue Cash Flow

Development Development Development Growth Positive
Series C
Series C
Valuation Equity Funding: Demonstrated
Product-Market Fit Series B
• Founder-Funded
• Early Angel
Series A
• Pre-Seed
• Seed-Stage
Time

Uses of Venture Debt
Use Case #1: Extend Cash Runway to the Next Milestone

Revenue
Threshold Goal
Series C
Valuation
Series B
Series A Wants to reach a revenue

threshold before another
equity funding (series C)
Time

Use Case #1: Extend Cash Runway to the Next Milestone

Series C
Venture debt
enables reaching a
Venture Debt higher valuation
Valuation Raise venture debt

Series B
between equity
rounds to extend
Series A cash position until
revenue milestone
Time

Use Case #2: Extend Cash Runway to Cash Flow Positive Stage (Breakeven Point)

Popular for tightly-held, founder-led Harder to get venture capital Use venture debt
businesses without a ‘venture-scale’ funding at a reasonable to reach cash flow
total addressable market valuation given limited upside positive stage
Valuation May eliminate the

Venture Debt need for subsequent
rounds of equity
Series A
financing
Time

Use Case #3: Provide Insurance for Potential Delays (Cash Cushion)

Valuation Series B
Series A Venture Debt
Helps the company reach its

next milestone and avoid
raising a ‘down round’
Time

Use Case #4: Co-Invest to Reduce Equity Dilution

Series C
Combined Venture Debt
Valuation Raise
Series B
Company has more negotiating
leverage with venture debt
Series A lenders at this point
Time

Use Case #5: Maintain Control

Angel and venture capital Equity investors want companies Founders may be Board seats and shareholder
investing are predicated to be acquired or to go public in a subject to a forced agreement requirements may
on liquidity. short period of time. liquidity timeline. also cause a loss of control.
Valuation
Venture
Debt
Venture debt allows the
founder team to
maintain control.
Time

Venture Debt & the 5 Cs of Credit
Venture debt is a highly specialized type of lending, but it is still a form of corporate credit at its core.
Underwriting corporate borrowing requires a strong understanding and application of the 5 Cs of credit.
5 Cs of Credit
Character Capacity Capital Collateral Conditions
Plays an
important role
Traditional
Lending

Venture Debt & the 5 Cs of Credit
Venture debt is a highly specialized type of lending, but it is still a form of corporate credit at its core.
Underwriting corporate borrowing requires a strong understanding and application of the 5 Cs of credit.
5 Cs of Credit
Character Capacity Capital Collateral Conditions
While venture debt lenders do seek first-ranking security claims

over corporate assets, the assets are often mostly intangible. Intellectual
Patents Trademarks
Lack of collateral and being early in its lifecycle means that Property
these companies are not typical candidates for commercial credit.

Risk vs. Cost
Companies should look for an optimal mix of financing that provides an adequate amount of funding while
minimizing the cost of capital (financing).
The cost of capital varies depending on the perceived risk of the firm seeking funding.
Cost of Reserved for less

risky companies
Financing
Larger company
Higher revenue
Profitable
More tangible assets
Senior-Secured
Risk

Risk vs. Cost
Used by companies
that may not qualify
Cost of
for bank debt
Financing Banks require
strict financial Low physical assets
covenants Early-stage companies
Debt/EBITDA
Venture Debt
Min. DSCR
Low revenue
Senior-Secured
Negative cash flow
Risk

Risk vs. Cost
Invest when the stage of

Costs come in the
Cost of development is higher risk
form of:
Financing Banks require
Higher interest rates
strict financial Venture Capital
covenants Warrant coverage
Debt/EBITDA Equity ownership means

Venture Debt
Min. DSCR higher investor upside
Less restrictive
Senior-Secured clauses due to
flexibility needs
Risk

Risk vs. Cost
Cost of This chart illustrates venture debt’s

Financing relative position between the two ends
of the financing spectrum.
Venture Capital
Venture Debt
Senior-Secured
Risk

Comparison of Funding Sources
Senior-Secured Bank Debt Venture Debt Equity
Revenue growth stage

Mature, cash flow positive stage
Lifecycle Stage (established product-market fit, Any stage
(high revenues)
clear path to profitability)
Nature of Growth Growth (speculative initiatives) Growth

Financing Accretive acquisitions Cash buffer Fund intangible assets
Nominal Lower rates

Interest Rates 3–7%
Debt is secured by underlying

Expected
assets so expected losses are
Return
lower
Level of
Dilution
Flexibility


(high revenues)

Nominal Lower rates

12–18% N/A
Expected 15–25% IRR (achieved through

15%+ RAROC >25% IRR
Return warrant coverage)
Level of
None Minimal – Moderate Most flexibleHigh
in terms of cash
Dilution
repayment, but granting board
Flexibility Low Medium – High seats lowers strategic flexibility


(high revenues)

Nominal Lower rates

12–18% N/A
Expected 15–25% IRR (achieved through

15%+ RAROC >25% IRR
Return warrant coverage)
Level of
None Minimal – Moderate High
Dilution
Flexibility Low Medium – High Medium – Very High

The Funding Process
The Funding Process
The funding process can be broken down into six main stages:
Origination Term Sheet

Screening
1 Sourcing of client 2 Assessment of fit
3 Goal posts for
opportunities financing
Due Diligence Legal Funding Period

4 Full end-to-end 5 Documentation
6 Interest begins to
analysis accrue
We will introduce a venture debt risk rating model in this course.
Using an example client, we will calculate underwriting parameters to generate a risk rating and indicative pricing.
We will then walk through a term sheet for the sample client.

Origination & Initial Screening
The first step of the funding process begins with origination – sourcing prospective opportunities.
CFI’s:
Sources of
Profitable Lead
Opportunities
Generation Course
Referrals from Venture Capital

Internet
Other clients Firms
A venture-backed company may need additional capital to achieve breakeven.

If venture debt can bridge this gap, it may be in the venture capital firm’s best interest to help secure it.
This will also help avoid diluting the original venture capital firm’s interest at a subsequent round.

It may also help the borrower get to some revenue threshold that will get them a higher multiple.
Original VC Firm’s
Revenue Equity Value
Revenue
Threshold
Higher
Multiple

Initial screening takes place over a call between the venture debt provider and the founder or CEO of the company.
Pro Forma
Company Pitch Deck Historical Financials
Financial Model
How much capital

Company’s specific
During the call, you will explore: are they looking to Plans for growth
needs
raise?
The goal of the initial screening is to determine if there is a good fit for both parties prior to executing a term sheet
and embarking on deeper due diligence processes.
This is also where the venture debt lender will start to risk assess the prospective borrower to provide an indicative
interest range and warrant coverage.

Term Sheet
Once you have determined there is a good fit, you may decide to issue a term sheet (discussion paper).
This document is non-binding but is designed to provide the company with a clear set of conditions to give them an
idea of what terms they should expect once the due diligence process is complete.
Propose reasonable Buffer for Negotiation

Negotiate terms during
terms that will be seen as
this stage
competitive
The types of items and information outlined in the term sheet include:
Proposed Loan Type of Loan Prepayment

Interest Rate
Amount (Structure) Penalties

Term Sheet
Once you have determined there is a good fit, you may decide to issue a term sheet (discussion paper).
This document is non-binding but is designed to provide the company with a clear set of conditions to give them an
idea of what terms they should expect once the due diligence process is complete.
Propose reasonable Buffer for Negotiation

Negotiate terms during
terms that will be seen as
this stage
competitive
Terms are generally driven by the level of competition in the market as well as the risk of the transaction.
We will produce a term sheet for our example client to better understand each section and how key structural
components are arrived at.

Due Diligence
Once negotiations have ended, and the term sheet has been signed by both parties, the due diligence process begins.
During this stage, the venture debt provider will dig into all aspects of the company, including but not limited to:
Historical Financial Current Management

Financials Projections Cap Table Team
This information is provided through a data room (a secure place to store privileged data).
Other steps include:
Sensitization of
Site Visits Customer Calls
Projections
Helps to better understand how Make assumptions to assess

the company is perceived in the how likely the company is to
market by key stakeholders achieve its projections
Due Diligence
Once negotiations have ended, and the term sheet has been signed by both parties, the due diligence process begins.
During this stage, the venture debt provider will dig into all aspects of the company, including but not limited to:
Historical Financial Current Management

Financials Projections Cap Table Team
This information is provided through a data room (a secure place to store privileged data).
Other steps include:
Sensitization of
Site Visits Client Calls
Projections
The exact formula for underwriting venture debt varies from firm to firm.
The process we will introduce includes a risk rating model and will cover important metrics to look out for.

Due Diligence
Due diligence seeks to answer a few key questions:
Is there a strong Is there strong revenue, revenue

Are there positive unit economics?
management team? growth, and cash flow?
Strong work ethic, passion, track Established product-market fit

record, success in past ventures Strong revenues
Skin in the game
Is there a clear path to What is the overall market

profitability or a liquidity event? opportunity ahead?

Due Diligence

Indicate that a company’s business
Strong work ethic, passion, track Cash flows may be negative if
model is working
record, success in past ventures invested aggressively in growth
Makes more money per customer
Skin in the game Otherwise, cash flow positive
than it costs to obtain them


Due Diligence

Strong work ethic, passion, track Cash flows may be negative if Venture debt providers should be
record, success in past ventures invested aggressively in growth able to project improving unit
Skin in the game Otherwise, cash flow positive economics as scale increases

Clear idea of how and when they Plays a strong role in the company’s
intend to achieve profitability growth potential
or reach the next round of Look out for ‘total addressable
equity financing market’ and ‘total serviceable market’

Due Diligence
Overall, the due diligence in a venture debt deal is performed at a similar level to that of a venture capital investor.
Due Diligence Process: 4–6 Weeks

Legal Documentation & Funding
Once the due diligence process is complete and the venture debt provider decides to move forward with the deal,
formal legal documents, including the final loan contract, are signed by both parties.
Funds are advanced
Company Venture Debt Provider
Ensures all matters are Deal is closed Drafts loan contract and
appropriately stipulated, legally other agreements
binding, and enforceable

Once the due diligence process is complete and the venture debt provider decides to move forward with the deal,
formal legal documents, including the final loan contract, are signed by both parties.
Funds are advanced
Company Venture Debt Provider
The funding process usually happens within a day or two.

However, it can take up to a week.
Cash on Investor
Hand Capital Call

It is common for investment funds to have their own credit facility, called a ‘capital line’.
Pool of available Temporary bridge between

Must advance cash prior to
cash extended by transaction close and the
receiving all investor funds
a senior lender receipt of cash
Investment Fund
Capital
Call Line Capital Call
Fund must give a

number of days
for investors to
deposit funds
Investors

Warrants
Warrants
Warrants represent the right to buy common shares at a fixed price within a specific period of time.
Warrant
Requested by Lender
Lender Growing Company
Offers additional upside Some founders associate

to lenders warrants with giving up equity
Warrants are the option to buy equity at a fair price.
They usually only amount to 1-2% of the total company equity, and the lender must pay for them.

Warrants
Warrants represent the right to buy common shares at a fixed price within a specific period of time.
Warrant
Requested by Lender
Lender Growing Company
Warrants may be part of the total return calculation for the lender.
They may want to adjust the ratio between warrants and cash interest to target an appropriate IRR.
However, the priority should be to consider the needs of the borrower.

Warrants
Warrants consist of three components:
Strike Price Number of Shares Expiration Date

• Predetermined price warrants • Represents the amount • Indicates when the warrant
can be exercised at warrant-holders can purchase term is over
• Usually equal to the fair • On or before the expiration • Term defines the time the
market value of company stock date lender has to exercise the
the day the warrant is issued warrant
• May be expressed as $X • Warrant terms typically range
• May be expressed as a from 2–10 years
discount to a future qualified
financing round

Warrants
If there is no current company valuation, you cannot calculate the number of shares.
In this case, the number of warrants a lender receives is expressed as a function of warrant coverage – the percentage
of the total principal invested that the lender gets in warrants.
Consider the following example:
We cannot calculate the

$3,000,000 Deal Represents the right to number of shares, but can
15% Warrant Coverage purchase up to still quantify the percent
$450,000 of stock of warrant coverage
Growing
Lender
Company
A lender in a lower risk venture debt deal may look for 5% warrant coverage compared to a higher risk deal where a
lender may look for upwards of 50%.

Advantages & Disadvantages of Warrants
Warrants offer a range of benefits for lenders and companies.
Lender Company
• Provide additional participation in • Priced at the value of equity at the
the company’s growth and returns time of issuance, ensuring fair
• If a company grows exponentially, pricing
lenders can experience significant • Represents money that will flow
upside into the company as the lender is
• Require no upfront costs required to pay for shares
• If exercised, stock can be purchased

up until the expiry date, giving the
lender time to get funds

Advantages & Disadvantages of Warrants
Warrants offer some disadvantages for lenders and companies.
Lender Company
• Have a finite life • Creates future dilution if exercised
• Value can fall to zero once by the lender
exercised, which may lead to • Equity value when exercised may
significant losses be dramatically higher than the
• Do not receive the same control strike price
rights as shareholders
• Do not receive dividends

Pricing Warrants
Warrants come with a strike price, which is generally equal to the stock’s market value on the day of issuance.
The easiest way to determine this is to use the valuation of the most recent equity round.
Company ABC is raising $2MM in venture debt
Venture Debt $100MM

Strike Price Company ABC
Lender = = $2 per share
per Share 50MM shares
• 10% warrant coverage • $20MM Series A

Warrant
= $2MM x 10% = $200,000 • $100MM valuation
Coverage
• 50MM shares
outstanding
$200,000
Warrants
= = 100,000
Received $2 per share

Pricing Warrants
If there was no recent equity round, they might instead agree to a negotiated value between the lender and the
company.
Venture Debt Negotiated

Company ABC
Lender Value
• Appropriate warrant • Looking to minimize

coverage dilution
• Attractive strike price
It is common for the two parties to struggle with a negotiated value due to their conflicting objectives.

Pricing Warrants
The third option is to use a discount to the valuation at the company’s next capital raise.
If the next scheduled raise is in a short time frame, the discount may be more modest as there is still time within
the warrant term for the company to continue generating enterprise value.
The opposite is true. If there is no scheduled raise for most of the warrant term, the discount may be higher.
Strike Price $100MM x (1 – 0.2)

per Share = = $1.60
50MM
Venture Debt $200,000

Warrants Company ABC
Lender = = 125,000
Received
$1.60
• 20% discount • Future $100MM raise

The lender receives 125,000 warrants • 50MM outstanding
as part of the proposed transaction. shares

Exercising Warrants
A lender may choose to exercise warrants if the value of the equity exceeds the warrants’ strike price
However, this does not guarantee liquidity.
Immediate
Liquidity
IPO
Equity Raise
Raising equity in the private
SPAC market does not guarantee a
secondary offering.

Exercising Warrants
Immediate
Liquidity
IPO
Equity Raise
The raise could be for growth
SPAC capital. Thus, the party that
exercises warrants only
achieves paper gains.

Exercising Warrants
Immediate
Liquidity Strike Price
$1 per share $3 per share
IPO
The lender can buy shares worth Equity Raise
$3 per share at a price of $1 per share. If the value of the equity has not
SPAC increased, it is best not to
exercise the warrant.

Exercising Warrants
Immediate
Liquidity Strike Price
$1 per share $0.50 per share
IPO
The lender would not exercise Equity Raise
the warrant. If the value of the equity has not
SPAC increased, it is best not to
exercise the warrant.
Most lenders wait until the last possible moment to exercise their warrants because it requires an outflow of
capital to the company.

On Commitment or On Usage
Warrants can be based on loan usage or loan commitment.
This is relevant in deals where the borrower is approved for a facility they are not obligated to draw down.
Usage vs. Commitment
Venture Debt Company ABC

Lender 10% Warrant Coverage
• Making a financial commitment • Prefer warrant coverage based

to the company on usage
• Want coverage to be based on 5% On 5% On • If they draw less than the full
commitment amount Commitment Usage loan, they give up less equity
Parties will often meet in the middle, arranging half the warrant coverage on commitment and the other half on usage.

Venture Debt Risk Rating Model
Model Overview
To effectively screen and commence due diligence on a prospective borrower, a venture debt lender needs to get a
sense of the company’s performance and level of risk.
We will walk through an example risk rating model for a hypothetical venture debt provider – CFI Capital Corp.
Assess important metrics Contains qualitative and

Output is a risk score
for venture-stage companies quantitative inputs
Corresponds with a
Align with key due
recommended interest rate
diligence questions
and level of warrant coverage

Model Overview
We will then introduce the example client – Company A – and work through a risk rating for the company.
The qualitative categories of the risk rating model include:
Management Industry Marketability Business

Assessment Assessment Assessment Assessment

Model Overview
The quantitative components of the assessment include key historical and pro-forma figures like:
Total Assets/
Revenue Growth Gross Margins
Total Debt
As well as more venture-specific metrics like:
Customer
Customer Lifetime
Cash Runway Churn Rate Acquisition Cost
Value (CLTV)
(CAC)
Many venture debt providers will require prospective borrowers to fill in a checklist or worksheet that specifically
asks for these metrics.
Alternatively, you may need to dig or calculate this information using a company’s financials, projections, business
plan, industry report, or through other primary sources of information.

Model Overview
The quantitative components of the assessment include key historical and pro-forma figures like:
Total Assets/
Revenue Growth Gross Margins
Total Debt
As well as more venture-specific metrics like:
Customer
Customer Lifetime
Cash Runway Churn Rate Acquisition Cost
Value (CLTV)
(CAC)
Part of your due diligence is corroborating as many of these figures as possible before entering a transaction and
advancing loan proceeds.

Management Assessment
Entrepreneurial Experience Experience in Industry Management At-Risk Capital
• Does the leadership team have • Industry experience can go a • Helps you understand their level
experience running their own long way of skin-in-the-game
business venture? • Founders with significant industry • If things go wrong, will they stay
• Many founder-led teams have experience have many contacts and try to make it work, or will
minimal entrepreneurial and a good idea of industry they walk and default?
experience dynamics and its ongoing • Part of due diligence is
evolution corroborating the person’s
personal financial situation using
personal financials
• Sweat equity refers to an ‘earned’
ownership stake

Management Assessment
Other leadership factors you might consider evaluating or adding to your risk assessment include:
Experience level and quality of the Management’s general level of

board, including strategic advisors organization, including record-keeping

Industry Assessment
Industry analysis is important in any due diligence process – even more so in assessing venture-stage companies.
Consider that most venture-stage companies are in the business of disrupting the status quo. Understanding the
market and potential regulatory headwinds is imperative.

Industry Assessment
Total Addressable Market (TAM)
• Reflects the total market

opportunity available for a
company to try and win
• Expressed as number of potential
users or dollars of available
revenue
• A larger TAM only needs a small 1% x ($100MM TAM) = $1MM Revenue
amount of penetration to achieve
meaningful revenues 1% x ($1Bn TAM) = $10MM Revenue
• Most venture-stage companies
have research around TAM, which
should be made available
Industry Assessment
Total Addressable Market (TAM)

TAM
• Corroborating TAM may be
challenging, as disruption breaks UBER – Ride-Sharing Service Taxi Industry
down barriers between markets
Ground Transportation Industry

Industry Assessment
Total Addressable Market (TAM) Regulatory Environment Market Growth Rate
• Corroborating TAM may be • UBER’s rise to power came with • A growing market means a
challenging, as disruption breaks many legal battles – real cash growing opportunity and a
down barriers between markets impacts on the firm growing TAM
• A company that operates in
industries with low/steady levels
of regulation is less risky
• Attractive: areas where a new
entrant is expected to encounter
fewer regulatory headwinds

Industry Assessment
Other industry factors you might consider evaluating or adding to your risk assessment include:
Barriers to Entry Rate of Market Adoption
How fast new users participate

in the industry
If the product is too early to the market,
it may suffer from slow revenue ramp
up and high cash burn

Industry Assessment
Other industry factors you might consider evaluating or adding to your risk assessment include:
Barriers to Entry Rate of Market Adoption
Cross-referencing the client’s information is important. You may find success using industry and market research
providers to help get extra insight into industry trends.

Marketability Assessment
Marketability is how attractive a business is to a potential acquirer.
In general, a company’s marketability is largely driven by the underlying business – brand equity, growth
potential, margin profile, and other factors will appeal differently to different players in the M&A landscape.
However, there are other factors that can make it easier or more difficult to get liquid.

Access to Capital Venture Capital Sponsorship
• More options are better • Previous VC investment is a good

• Bank loans are difficult to obtain sign
for venture-stage companies • Implies deep due diligence and
• It makes sense to refinance ongoing board oversight
venture debt with cheaper senior • VC firm will likely be good
lending stewards of company operations
• This represents an additional • VC firm wants to ensure the
means of return of capital for a company achieves liquidity in a
venture lender reasonable timeframe

Access to Capital Venture Capital Sponsorship M&A Activity in the Market
• More options are better • If founders are the only funding • Can influence the timeline to
• Bank loans are difficult to obtain source, they may not push for acquisition or liquidity, as well as
for venture-stage companies liquidity in a desirable timeframe the valuation
• It makes sense to refinance • May also not understand how to • Greater levels of M&A activity put
venture debt with cheaper senior get liquid at an optimal valuation upward pressure on valuations
lending • Credibility and expertise of a VC
• This represents an additional would not be available
means of return of capital for a
venture lender

Other marketability factors you might consider evaluating or adding to your risk assessment include:
Reputation of Existing VC
Timeline to Exit
Partners
Management team with a liquidity plan It is a positive signal if the firm is

inside 3–5 years should provide backstopped by a reputable VC
comfort to the venture debt lender

Business Assessment
Customer Concentration
• Not an issue for B2C businesses

• May be an issue for B2B Company sells to Walmart Walmart could represent >50% of total revenue
• Losing a large customer could be
an existential threat to a
borrower’s business
• Concentration: % of revenue
from a business’ five largest
customers

Business Assessment
Customer Concentration Average Contract Duration Churn Rate
• Not an issue for B2C businesses • Especially important for • Inverse of customer retention
• May be an issue for B2B subscription or retail firms that • 90% retention = 10% churn
lock customers into contract terms
• Losing a large customer could be • Lower churn is better
an existential threat to a • Longer-term contracts represent
borrower’s business longer-term sources of revenue
• Concentration: % of revenue
from a business’ five largest
customers

Business Assessment
Other business factors you might consider evaluating or adding to your risk assessment include:
Number of Strategic
Seasonality of Sales
Partnerships
Can put a business in a cash crunch

during periods of the year
Consider this factor in your loan
structure

Financial Metrics
We also need to look at important financial metrics for the risk assessment.
We have included seven financial metrics in our model:
YoY Revenue Runway Average Gross % Avg. Recurring

Growth (in Months) Margin Revenue
Total Assets Customer Lifetime Value (CLTV) CAC Payback Period

Total Debt Customer Acquisition Cost (CAC) (in Months)

Financial Metrics
We have included seven financial metrics in our model:

Financial Metrics
We assess these metrics twice:

Financial Metrics
Other financial metrics you might consider evaluating or adding to your risk assessment include:
# of Months Until
# of Months Until Interest Expense as a
Operating Income
EBITDA Turns Positive % of EBITDA
Turns Positive
Not useful if the company is

running at an EBITDA loss

Revenue Growth & Runway
Year-over-year (YoY) revenue growth is an important metric for venture stage companies.
Heavy investment today should help a company achieve a revenue figure where its unit economics start to make
sense, and they can produce free cash flow.
Faster top-line growth is usually better than slower if the company has sufficient cash reserves or access to capital
to keep them growing until they are cash flow positive and profitable.

Runway represents the number of months it will take a company to run out of cash.
Cash on Hand
Runway = Amount of cash
Burn Rate the company uses
each month

Cash on Hand
Runway = NTM Free Cash Flow
Burn Rate
12
If the company’s NTM free cash flow is positive, they do not have a burn rate over the next 12 months.
Runway will be Burn rate also

higher as cash on increases to reflect the
hand will be higher new interest expense


Gross Margin, Recurring Revenue, & Total Assets/Total Debt
A producer of physical goods usually has a lower margin than a SaaS company – some software companies
command margins of >80%.
We recommend modifying the scale to more accurately fit your needs

Recurring revenue is valued higher than transactional revenue in the private equity world.
Companies with a subscription business have more predictable future cash flows than companies that need to
convince customers to make one-off purchases.
Subscription revenue is contractually obligated through the contract period.
Companies with a higher proportion of recurring revenue are more predictable and less risky borrowers.

Tangible Assets/
Total Debt: 1.00x
If the company ceased operations today and liquidated all of its assets at book value, how many times would
that cover debt exposure?
The process is not always straightforward. For instance, does the asset value include the cash balance? What about
intangible assets?
To mitigate these shortcomings, venture lenders sometimes use tangible assets/total debt.
You could also remove cash from the asset balance as well since most companies will burn through their cash trying
to make their business work before ceasing operations and liquidating.
Customer Financial Metrics
The last few measure are customer-level metrics.
Two key customer-level metrics in our model are:
Customer Lifetime Value (CLTV) CAC Payback Period

Customer Acquisition Cost (CAC) (in Months)
The lifetime value of a customer is a core tenet of many business models.
An early-stage venture may appear to have weak unit economics on the surface, but they are likely to improve
materially with greater scale.

The components of customer lifetime value are:
1 2 3
Average Customer Average Annual Contribution

Lifetime Revenue/Customer Margin
Can substitute
1
gross margin
Churn Rate
1
= 5 Years
20%

The components of customer lifetime value are:
1 2 3
Average Customer Average Annual Contribution

Lifetime Revenue/Customer Margin
A higher CLTV is better than a lower one.
However, what matters is CLTV relative to the cost of acquiring that customer: customer acquisition cost (CAC)
Customer Lifetime
5000 Value (CLTV)
Viable Long-Term
Bad Unit Economics
Customer Acquisition
6000 Cost (CAC) Business

Historical CLTV/CAC may differ from the pro-forma. This is okay as long as you have confidence that the company
can grow into its projections.

Total Aggregate
CAC Payback CAC
Period
(inMargin
Total Agg. Gross Months)
on New Revenue
If you would like to do a deep dive on venture stage customers and unit economics metrics:
SaaS Financial
Modeling Course

Total Aggregate
CAC Payback CAC
Period
(inMargin
Total Agg. Gross Months)
on New Revenue
Please open the file called ‘Venture Debt Risk Rating Model_BLANK.xlsx’.

Client Case Study
Client Introduction
Company A has two founders – Julie Smith and Dave Roberts.
The company has designed a revolutionary supply chain management software for the hospitality sector.
• High margin with strong upside
• Industry has few regulatory headwinds
• Julie has spent 12 years in hospitality roles and four years in

procurement for a major hotel chain
• Dave is a software engineer with eight years of experience

developing for B2C and B2B audiences
• The founders have no prior entrepreneurial experience
• Date: February 2022

Client Introduction
• Began R&D in 2017
• Raised $500,000 from friends and family, including $100,000 each of

their own personal cash – represents 10% and 5% of Julie and
Dave’s net worth, respectively
• Raised $1MM in a Series A financing in 2018 from a local venture

firm
• In 2020, they raised follow-on capital (Series B) from the same

fund – 7.0x ARR
• Sales have been exclusively domestic, but they are looking to

expand globally
• This will increase CAC but will boost profitability in the long-term

Client Introduction
• Have discussed raising Series C but are not pleased with the
proposed valuation range of 9–10x ARR
• Are confident that if they can reach $10MM ARR by end of 2023,
they will be able to raise at 12.0x ARR
• There is heavy M&A activity in the market, and appetite is much

greater for growing companies of this size
• They have approached your firm for a round of non-dilutive

financing to help them reach this milestone
• Company A is asking for $3MM in venture debt

Client Introduction
You will have an opportunity to issue a term sheet.
Use the information in this lesson and the pitch deck to complete a preliminary risk assessment for this borrower.
You can approach this case study in three ways:
Try each section alone, and Work through the entire

Work on the case
watch the debriefs after, rating alone, then compare
concurrently with CFI
section-by-section with our answers
Download & Open:
Company A Pitchbook.pdf
Venture Debt Risk Rating Model_BLANK.xlsx

Term Sheet
Term Sheet Introduction
The term sheet is a non-binding, mostly bullet-point document.
The term sheet is where we start to set structural parameters of the deal and where we kickstart the client
negotiation process.
We have provided a sample term sheet populated based on the information we have been provided about the
prospective borrower and the risk rating we have calculated.
Many sections are specifically tailored to each

prospective transaction
Company A Term Sheet.pdf

Non-Binding Agreement & General Information
The formal loan

Terms outlined in this
agreement is the document
document are not final
that does not change


The company’s legal name

may not be the same as
their ‘business name’

Currency
Currency is especially important for the types of companies that seek out venture financing.
These are frequently technology players that may not be restricted to the same geographic borders or constraints
as a vendor of physical goods.
Prospective Borrower Foreign Country
Seeks currency in
Most sales are made abroad.
Management may want to

make principal and interest
payments in this currency.

Currency
Currency is especially important for the types of companies that seek out venture financing.
These are frequently technology players that may not be restricted to the same geographic borders or constraints
as a vendor of physical goods.
If the borrower and lender are in different jurisdictions with different currencies, there will be currency risk.
If the exchange rate moves unfavorably, it is possible for the lender’s return to be eroded considerably.

Currency
Example: Suppose CFI Capital Corp operates in Canada, but Company A is located in the US. Company A wants loan
proceeds in USD.
CFI Capital Corp. would have to raise USD from investors or convert their home currency (CAD) to USD:
Subject to the risk of USD/CAD converging (USD buys less CAD)
Convert CAD to Repayments Repayments Repayments Repayments

USD at spot rate (USD) (USD) (USD) (USD)
Time

Currency
proceeds in USD.
CFI Capital Corp. would have to raise USD from investors or convert their come currency (CAD) to USD:
If USD/CAD diverges, repayments are more profitable (USD buys more CAD)
Convert CAD to Repayments Repayments Repayments Repayments

USD at spot rate (USD) (USD) (USD) (USD)
Time
Venture debt lenders must be aware of currency risk in any cross-border transaction.

Currency
proceeds in USD.
CFI Capital Corp. would have to raise USD from investors or convert their come currency (CAD) to USD:
Foreign Exchange Fundamentals Course
Venture debt lenders must be aware of currency risk in any cross-border transaction.

Amount & Seniority
There may be more than one The amount is sometimes

credit facility. presented as a range.
The term sheet is for the purpose of negotiations and to provide indicative structural elements.
The final loan agreement would have a fixed loan amount once negotiations and due diligence have been
completed.

Amount & Seniority
This is structured as a senior note as CFI Capital Corp. is actively seeking a first-ranking security interest.
With larger, more established borrowers, it is possible they already have a commercial banking relationship.
The venture debt provider may have to take a second charge, making them a ‘junior note’ or ‘subordinated money’.
They may negotiate an intercreditor agreement with the commercial bank, where first-ranking priority over specific
assets may be stipulated.

Amount & Seniority
This caveat serves as a catch-all for the lender, providing the borrower notice that there will be more things in the
final loan agreement that have not yet been outlined.
Most term sheets will expressly stipulate the jurisdiction in which the agreement is to be governed.
The jurisdiction of governance is frequently the location where the borrower’s business is headquartered.
If the jurisdiction is different from the lender’s, it will be factored into the legal due diligence process.
The jurisdiction can also affect how the public registration of security interests is executed and enforced.

Interest Rate
Attractive Risk Profile: 12% Interest Begin at 15% and negotiate down to 12%
In most cases, venture debt deals will have monthly interest payments.
Interest is calculated as:
Annual Interest Rate

Monthly Principal
= x
Interest Outstanding
12 Months

Interest Rate
Attractive Risk Profile: 12% Interest Begin at 15% and negotiate down to 12%
In most cases, venture debt deals will have monthly interest payments.
Interest is calculated as:
Annual Interest Rate

Principal
$37,500 = x
Outstanding
12 Months

Interest Rate
Amortizing Payment-In-Kind
Simple Interest Loan
(Reducing) Loan (PIK) Loan
Less common in the Interest accumulates and

venture space compounds before being paid
out at maturity along with the
Capital is often borrowed as a principal owing
cash buffer – taking the loan
makes no sense if monthly More common in the
principal payments required venture space
No monthly cash obligations
Riskier for the lender

Interest Rate

Interest Rate
Amortizing Payment-In-Kind
Simple Interest Loan
(Reducing) Loan (PIK) Loan
Sometimes, the structure is blended cash + PIK, depending on how flexible and accommodating the lender needs to be
to win the deal.
Ultimately, every lender should be trying to set up their client for success.
An inappropriate payment structure can put undue pressure and risk longer-term liquidity issues.
With venture stage companies, this could force a ‘down round’ if they need to raise equity capital while they are in
a low cash position, reducing negotiating leverage.
For lenders, the ultimate goal is to make sure borrowers can make payments. By offering PIK, a lender can add an
extra layer of flexibility.

Maturity Date & Payment Schedule
The maturity date refers to when the loan period ends, and the borrower’s final payment is due.
For a simple interest-only loan, this is the principal amount outstanding. For a PIK structure, this would be all
principal plus accrued interest upon, due upon maturity.
Company A expects to hit $10MM in ARR by year-end 2023, at which point they anticipate another round of equity.
This liquidity should fall within two years, but if CFI Capital Corp proposes 24-months and there is any kind of delay in
the financing, the loan may come due before there is any cash available to return the principal.
Ensures more time for the company

Allows room for negotiation
to secure their Series C funding

Maturity Date & Payment Schedule
It is common for a venture debt lender to include a payment schedule with the delivery of the term sheet.
This is especially true if the loan includes any blended structures or reducing components – the borrower will
need to factor these into their three-year projections to see how cash outflows affect liquidity.
Payment schedule may be a point of negotiation at the term sheet stage.
Some lenders may also offer a short-term interest deferral. This provides the borrower the opportunity to defer
their first X number of months to be paid later
This is used to support near-term liquidity and growth needs. In these cases, interest accrues.

Early Prepayment
In venture debt deals, a borrower can buy out the loan at any time at a cost – an early prepayment penalty.
A lender extends funds with a target return in mind, expecting a certain net present value (NPV).
Interest
Cash Interest Interest Interest Interest Interest & Principal
Outflow Received Received Received Received Received Received
NPV

Early Prepayment
In venture debt deals, a borrower can buy out the loan at any time at a cost – an early prepayment penalty.
A lender extends funds with a target return in mind, expecting a certain net present value (NPV).
Interest
Cash Interest Interest Interest & Principal
Outflow Received Received Received Received
NPV
They then need to turn around and redeploy those funds into another deal as quickly as possible since the cash is not
generating any return. This affects the fund-level IRR for its investors.
Thus, prepayment penalties are designed to ensure that a minimum return threshold can be expected, and to
buy the firm some time to find an alternative transaction.

Early Prepayment
Collectively, these terms require that the borrower will pay at least 18 months of total interest in the event of an
early prepayment.
This is because the funds were advanced under certain circumstances.
If those circumstances change, the venture debt provider will want its funds back before the new management
group takes control.
This added layer of protection is embedded in the term sheet in a subsequent section called negative covenants.

Conditions & Key Employee Commitment
The conditions precedent section is similar to what you would see in a traditional credit transaction. It lists items or
conditions that must be satisfied prior to the advance of any loan or investment proceeds.
An investment committee is a group of stakeholders that combines the skills and expertise of board members and
credit adjudicators.
They ensure that the firm is deploying its funds with a sensible risk profile.

Examples of conditions you may find in this section include:
The closing of a The repayment of a

concurrent venture An equity co-raise. different outstanding debt
capital funding round. obligation.
The execution of a key

sales contract that is The hiring of a critical
important to near/mid- senior leadership position.
term success.
Anything the lender wants to be completed ahead of the advance of funds is usually considered reasonable.
As with any type of creditor, you have the most bargaining power with a borrower ahead of funding.

The key employee commitment section asks the borrower to commit the majority of management effort to the
business.
In venture debt deals, the lender is leaning heavily on management drive, experience, and capabilities, or on the
passion and business acumen of a key individual.
If that person is critical to the success of the business, the lender should include this in the agreement.
If the agreement is drafted appropriately, it would be considered a default event if the key employee leaves.
It takes a tremendously passionate founder team to grow a business into its venture-backed valuation.

Security
Security is the collateral to backstop the credit exposure.
With most forms of traditional credit, it tends to be tangible and specific.
Real Property Equipment Assets
This is often not the case with venture debt – early-stage companies tend to be heavy on intangible assets.
However, a venture debt lender can still seek out a first-ranking charge against the company’s assets using a general
security agreement (GSA).

Security

Security
This secures the loan in several ways:
In a default scenario: If the borrower wants to borrow

from a traditional lender:
Creditor sells any intellectual
property the company holds Ensures venture debt is repaid first
Also liquidates any receivables to It is refinanced, and the venture

recoup outstanding principal lender is repaid in full

Security
Venture lenders may also seek additional security interests:
Founder/CEO pledges their shares in the company to the lender.

1 Share Pledge This ensures the lender can secure additional voting rights and exert
control in default scenarios.
Corp. Guarantees
2
Guarantees from related companies with common ownership
from Subsidiary
elements, but not directly the borrower.
Companies

Security

Corp. Guarantees
2
from Subsidiary
Companies

Security

Corp. Guarantees
2
from Subsidiary
Companies
3
Personal Guarantee Indirect security; serves as alternative recourse. Less common in
from the Founder venture debt deals.

Restrictions & Use of Proceeds
Venture-stage companies are constantly evolving.
A prudent venture debt provider will want to put some controls in place to protect their at-risk capital.
Growth

Negative covenants are a form of control.
They are designed to prevent a borrower from doing something altogether or without the lender’s approval.
Negative covenants are not meant to be so punitive or restrictive that they reduce the company’s ability to operate
effectively.
They are meant to ensure that material changes are not made that may adversely affect the business or reduce its
ability to meet venture debt obligations.

The main categories of negative covenants generally relate to capital structure, security, and control.
These include restrictions on:
Incurring new
indebtedness, Repaying existing Forming
subsequent liens, or indebtedness subsidiaries
security interests
Transferring Disposing Changes

intellectual property of assets of ownership
Consider negative covenants as arrangements that force the management team to ask for permission.

Negative covenants are important and can make for difficult negotiating points.
They should only be included in a deal if there is a material risk that a certain action is likely to occur and that it
would have an adverse impact.
This section will be expanded

in the final loan documents.

The use of proceeds section is another area where a lender may wish to place restrictions on the borrower.
Example: Some proceeds may be earmarked to buy out an absent founder or retire existing credit facilities.
Growth is another common use of proceeds.

Warrants
Warrants can help sweeten the deal for the lender but may also be a point of negotiation for borrowers.
10% x $3,000,000 15% x $3,000,000

Warrant Coverage
= $300,000 = $450,000

Warrants
Warrants can help sweeten the deal for the lender but may also be a point of negotiation for borrowers.
CFI Capital Corp. is leading with 15% expecting some pushback down towards 10% coverage.

Warrants
Without a current valuation, calculating a strike price can be difficult unless the two parties agree on a valuation.
Without knowing the number of shares outstanding at a future raise, we cannot calculate the number of warrants.
Company A has a compelling business Company A wants to raise equity in the

Positives:
model and strong unit economics. future to support further growth.
There could be a considerable increase

The next equity raise may not be for
Negatives: in company valuation that CFI Capital
upwards of two years.
Corp. will not participate in.
Thus, CFI Capital Corp. might look for a steeper discount to the next valuation.

Warrants
Depending on how competitive the deal is, the client may negotiate this down.
Coming in at the higher end of a reasonable range should help anchor the negotiation.

Warrants
Depending on how competitive the deal is, the client may negotiate this down.
Coming in at the higher end of a reasonable range should help anchor the negotiation.
A five-year warrant term means that these warrants can be exercised at any time within five years.

Success Fee
An alternative to warrants is a success fee.
A success fee is like a perpetual equity stake in the borrower’s company.
It is usually agreed upon and issued to the lender at the time of the loan with no cash consideration – effectively for ‘free’.
The success fee is usually expressed as a percentage of the company’s enterprise value.
Net proceeds represent the gross

proceeds less brokerage and legal fees

Success Fee
Success fees usually range from 0.5–1.5% of a company but only become valuable when the company is sold.
They are sometimes used when a borrower’s cap table is too complicated to negotiate warrants.
As a lender, you may prefer using a success fee over warrants for three main reasons:
1 2 3
You do not need It cannot
It is perpetual.
to pay cash. be diluted.
Assume that Company A is worth $10MM at the time of the term sheet delivery.
Warrants, if used instead, could have been

In five years: $100MM x 1.25% = $1.25MM
diluted during this five-year period.

Success Fee
Success fees usually range from 0.5–1.5% of a company but only become valuable when the company is sold.
They are sometimes used when a borrower’s capital structure is too complicated to negotiate warrants.
As a lender, you may prefer using a success fee over warrants for three main reasons:
1 2 3
You do not need It cannot
It is perpetual.
to pay cash. be diluted.
Due to the highly favorable nature of success fees, obtaining one from a borrower is often more difficult than warrants.
Sometimes, starting negotiations with a proposed success fee with the intention of landing on a generous
warrant coverage package is a reasonable approach.

Deposits & Fees
As with other types of financing, deposits are common in venture debt deals.
There are two reasons these are frequently employed:
Dissuades borrowers from shopping

1 2
Protects the efforts of the lender
around for competitive term sheets
through their due diligence process
from other firms
To accomplish this, a deposit must be a meaningful amount of money (e.g., $25k–50k), but not so much that it serves
as a deterrent to executing the term sheet.

Deposits & Fees
As with other types of financing, deposits are common in venture debt deals.
There are two reasons these are frequently employed:
Dissuades borrowers from shopping

1 2
Protects the efforts of the lender
around for competitive term sheets
through their due diligence process
from other firms

Deposits & Fees
There are three possible outcomes:
1 The deal moves forward, and the deposit amount is credited towards closing expenses, the
setup fee, or the first month’s interest.
2
The lender decides not to proceed with the transaction, and the deposit is returned to the
borrower less any legal fees incurred to date.
The lender secures investment committee approval for a deal that is aligned with the terms
3 presented in the term sheet, but the borrower decides not to proceed; further, the borrower
forfeits the entire deposit amount.

Deposits & Fees
With respect to expenses, venture debt lenders will try to keep these reasonable.
However, borrowers should expect to pay the legal expenses for both their own counsel as well as the lender’s.
Some lenders also charge a due diligence fee, although that is often embedded in the setup fee.

Deposits & Fees
With respect to expenses, venture debt lenders will try to keep these reasonable.
However, borrowers should expect to pay the legal expenses for both their own counsel as well as the lender’s.
Some lenders also charge a due diligence fee, although that is often embedded in the setup fee.
1.25% x $3,000,000 = $37,500
The setup fee may also be called a ‘closing fee,’ ‘disbursement fee,’ or a ‘drawdown fee.’
This fee is generally between 1–2% of the total loan proceeds and covers internal underwriting costs. It may also
serve to incrementally increase the overall IRR of the transaction.

Information Rights & the Right to Audit
The information rights section is important because it outlines what ongoing information the borrower is expected
to provide to the lender and how often they are expected to provide it.
Lenders require information such as monthly financials to keep track of their portfolio companies’ performance and
to identify potential early warning signs before they become more problematic.

Information Rights & the Right to Audit
The right to audit section provides lenders the permission to audit the company.
This may be used in situations where a lender thinks something unusual is happening with the financial results.
They may want to double-check that the information provided to them is accurate.
If a lender decides to perform an audit, it is generally up to them to foot the cost, although wording in the loan
agreement may permit the lender to recoup this cost from the borrower if fraud is identified.
In many jurisdictions, venture-backed companies already have a requirement to provide

audited statements to their investors. Thus, many would already be producing them.

Default
The default section starts to define when and how a loan may go into default.
A default is the failure to fulfill an obligation, which then triggers a ‘remedy period.’
This is followed by a series of potential rights that may be enacted by the lender if the default is not resolved
within this period.
Unresolved Repayment of Loan,

Default Event Interest, & Fees

Default
There are two types of defaults:
Technical Default Financial Default
When the borrower violates a When the borrower has not

covenant (e.g., late/missing made a scheduled interest or
reporting) principal payment
The lender can decide whether these defaults should be treated the same or differently.
The section in the term sheet defining defaults barely scratches the surface of what will be in the final agreement.
The term sheet should ensure that both the lender and borrower are on the same page about the major
categories of default as well as what rights the lender will have.

Default
From the borrower’s perspective, it is important to understand two key points:
What is considered an What happens in an

event of default? event of default?
Aside from fraud cases, it is generally in the lender’s best interest to help the borrower work through challenging
situations during the remedy period.
Quickly collecting on security will severely limit the company’s ability to operate or raise additional funds, which
may be the most likely source of loan repayment for a company having difficulties, even if it requires a ‘down round.’
In venture, if there is a default, a lender may not recover any capital due to a lack of specific, tangible collateral.
It is very important to do extensive due diligence and pick borrowing companies carefully.

Default
Defaults can often be worked out over time. It is in the lender’s best interest to help the company restructure.
This may come in the form of a forbearance agreement.
Forbearance Agreement
When a lender agrees to modify the terms of the loan to allow

the company to continue to operate.
These agreements come at a significant cost to the borrower,
including a potential increase (ratchet) of the interest rate.

Confidentiality & Exclusivity
Confidentiality is a legally binding section of the term sheet and discourages the company from sharing the
contents of the term sheet and the eventual loan with outside parties.
It is common for a venture debt deal to be competitive – multiple firms may be bidding to provide financing.
If a prospective borrower is sharing term sheets with competitors, it will erode the negotiating power of all potential
lenders.
Additionally, some firms have unique structures or language in their term sheets – this would reveal some of their
trade secrets.
Breach of
Legal Ramifications
Confidentiality

Confidentiality & Exclusivity
Exclusivity is a legally binding portion of the term sheet that ensures that, once the term sheet has been signed, the
borrower agrees not to look for alternatives.
There is typically a finite period over which this applies, which should align with a window that is appropriate to
conduct due diligence and advance the loan proceeds.
If a prospective borrower decides to pursue a deal with another lender once the
term sheet is signed, they will forfeit their deposit.

Closing Items
The final sections of the term sheet outline next steps and proposed deadlines.
Reinforces that the term sheet is not a Serves to recap key terms that the
final loan or investment contract lender wishes to offer
Actual terms are subject to:
Full and Thorough Production of Formal Review of

Final Execution
Due Diligence Legal Agreements Agreements

Closing Items
This section provides an estimate of the intended date for the advance of funds.
It is important to propose a realistic deadline, factoring in the time needed to conduct due diligence, get through
legal overviews, and to advance the funds.

Closing Items
The lender will honor the terms up until this date.
The borrower may come back after the expiry date but should expect terms to change.

Conclusion
Conclusion
Explain the early enterprise lifecycle, Navigate the funding process Examine how warrants work
where venture funding fits within it, and
the most common uses of venture debt
Interpret a venture debt risk rating Analyze an example borrower and risk Walk through the important elements
model and discuss the key analysis rate them using a venture debt risk of a term sheet and discuss how a
metrics used to assess a transaction rating model venture lender may negotiate key points

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Venture Debt

Corporate Finance Institute®

Venture debt loans are generally not asset-backed.

Venture lenders have experience with high-growth

Warrants provide equity upside.

Corporate Finance Institute®

Entrepreneurs (Company) Venture Debt Lender

Wants to issue debt to a

Corporate Finance Institute®

Reduces the average cost of

Corporate Finance Institute®

What should ABC company do to raise the remaining $2MM?

1 Raise More Equity:

$2MM Company ABC gives

Corporate Finance Institute®

What should ABC company do to raise the remaining $2MM?

2 Raise Venture Debt:

Raise $2MM of venture debt with 10% warrant coverage.

$2MM x 10% Company ABC dilutes

Corporate Finance Institute®

What should ABC company do to raise the remaining $2MM?

1 Raise More Equity: 2 Raise Venture Debt:

More Expensive Cheaper

Corporate Finance Institute®

Technology Product Market & Sales Revenue Cash Flow

Corporate Finance Institute®

Use Case #1: Extend Cash Runway to the Next Milestone

Technology Product Market & Sales Revenue Cash Flow

Series A Wants to reach a revenue

Corporate Finance Institute®

Use Case #1: Extend Cash Runway to the Next Milestone

Technology Product Market & Sales Revenue Cash Flow

Valuation Raise venture debt

Corporate Finance Institute®

Technology Product Market & Sales Revenue Cash Flow

Valuation May eliminate the

Corporate Finance Institute®

Technology Product Market & Sales Revenue Cash Flow

Series A Venture Debt

Helps the company reach its

Corporate Finance Institute®

Use Case #4: Co-Invest to Reduce Equity Dilution

Technology Product Market & Sales Revenue Cash Flow

Combined Venture Debt

Corporate Finance Institute®

Use Case #5: Maintain Control

Technology Product Market & Sales Revenue Cash Flow

Corporate Finance Institute®

Character Capacity Capital Collateral Conditions

Corporate Finance Institute®

Character Capacity Capital Collateral Conditions

While venture debt lenders do seek first-ranking security claims

these companies are not typical candidates for commercial credit.

Corporate Finance Institute®

Cost of Reserved for less

Corporate Finance Institute®

Corporate Finance Institute®

Invest when the stage of

Debt/EBITDA Equity ownership means