1/21/2024 0 Comments Define venture debtOtherwise dubbed as an audit, due diligence is used to confirm the financial integrity of the borrower before an agreement is made. Here are several common terms that fall into that latter category.īefore investors enter into an agreement, they perform due diligence to determine whether or not the borrower is viable. Other terms require some clarification for the uninitiated borrower. For example, the amount borrowed, the interest rate, and the length of the loan are all pretty self-explanatory. Important Terminology & Concepts to UnderstandĬertain concepts associated with venture debt term sheets are easy to understand. We’ll dive into the most important terminology, the most critical concepts, and leave you with enough know-how so you can thoroughly impress your lender. In other words, investors don’t get any say over the company’s direction or current leadership.īelow, we’re going to demystify the venture debt term sheet. In contrast with other term sheets, a venture debt term sheet does not contain any stipulations about voting rights, as venture debt itself is non-dilutive. While these pieces of information may help to inform an eventual legal agreement between the lender and borrower, the venture debt term sheet is not a contract in and of itself. It may, for example, spell out a few basics about the payment terms, closing conditions, and investor commitment. It covers all the most significant aspects of the deal without getting caught up on every contingency under the sun. But they don’t have to be that way with a little preparation, you can feel confident going into negotiations to secure the best possible deal with the right lender.Īt its core, a term sheet is simply a non-binding document outlining the terms and conditions between a potential borrower and lender.Īs a “non-binding” agreement, the term sheet outlines the main stipulations of a funding deal before either party gets too deep in the due diligence process. “Our prediction is that venture debt lenders will begin to rely less heavily on what the “loan-to-value” of a business is, and instead start to focus on capital efficiency, ability to become profitable, etc.,” he said.Looking to forego the additional equity round and opt for venture debt instead? If so, you’re going to want a firm understanding of the venture debt term sheet before you execute a deal.Īs many small business owners know, term sheets can be both confusing and intimidating. We’re telling founders that they should be prepared for the possibility of higher cost of capital now and in the foreseeable future.”Īli Hamed, a general partner at Crossbeam, has already seen prices climbing, and as that trend continues, he expects lenders will increasingly look for strong underlying unit economics. “Capital markets are certainly changing, so founders should expect this form of capital to rise in price as economic trends increase and the supply and demand dynamics in the market change drastically. Sophie Bakalar, a partner at Collab Fund, thinks macroeconomic trends will drive prices up. Just how much more expensive, however, is hard to pin down. How will it change? While several investors felt venture debt will remain a cheaper option for founders than equity, all of them agreed that it would get more expensive in the future. Rather, they expect the process of raising this kind of debt will start to look a lot different. TechCrunch+ recently spoke to five different VCs about the state of venture debt in the wake of SVB and then First Republic Bank’s collapse, and all of them said they don’t think the recent bank failures signaled the end of venture debt. The collapse of Silicon Valley Bank (SVB) was not the end of venture debt, but it was likely the end of companies raising venture debt with the same ease that many were accustomed to.
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