The Three Most Important Types of Equity In Your Business Pt. 3

Entrepreneurs are not always aware of the various financing structures that may be available to them when raising new capital to finance their growth. And, even if they are, they are not always sure what fair terms look like when receiving term sheets from investors.

“An entrepreneur needs to know about every financing opportunity available to them to make the greatest impact with their business.” 

Venture Debt

For startups with an existing product/track record or existing or future assets to secure a loan, venture debt is another option to consider.Venture debt is a senior secured loan that sits on top of the pile, in terms of liquidation preference (repaid before all other debt or equity holders).Venture debt is typically issued by more aggressive banks, like Silicon Valley Bank and Square 1, or venture debt investors, like Western Tech, Hercules or Oryx Capital.

Representative Terms:The note will most likely be secured by 100% of the assets of the business, and the lender will typically lend 25%-75% of the fair market value of assets, depending on the nature of the assets (e.g., ease of liquidating) and the stability of your business (e.g., consistent performance over last couple quarters). The lender will also most likely require that cash collateral be posted or the executives to personally guarantee the loan, in the event the company cannot repay it.The note typically comes with a six- to 18-month term, and carries a monthly cash-paid interest rate in the range of prime plus 2%-4% per year. There are often, but not always, warrants issued to the lender in these types of transactions (in the 1%-5% ownership range). This issuers are typically looking for a 25-35% annual return on their investment, not as much as equity in the 35%-55% range, and not as high as traditional bank debt in the 5%-10% range.

• Advantages: The least dilutive to your ownership, allowing you to keep 100% control and economic upside.
• Disadvantages: Do not take this on if you do not have 100% visibility into repaying the loan, as the bank can force you to liquidate the company to recoup their loan, forcing the company (or yourself as guarantor) into liquidation or bankruptcy. Interest payments needs to be paid in cash each month.