Venture Debt

With equity financing (like raising a VC round), you give up ownership stake in your company in exchange for capital. Venture debt is a loan you keep full ownership, repay the principal plus interest, and typically issue only a small warrant (5–20% of the loan amount). Venture debt is non-dilutive, meaning it doesn't reduce your ownership percentage, which can significantly increase the value retained by founders at exit.

Venture debt is typically raised alongside or shortly after an equity round (Series A or later), when a lender can see institutional backing and a clear path to growth. Taking on venture debt too early (pre-revenue or pre-product/market fit) is risky because you're adding debt service to a business that may not yet have predictable cash flow. The ideal time is when you have institutional investors, proven revenue metrics, and a specific use for the capital.

Warrants give the lender the right to purchase equity in your company at a predetermined price (usually the price per share from your most recent equity round). Warrant coverage in venture debt is typically 5–20% of the loan amount so on a $5M loan at 10% coverage, the lender receives warrants to purchase $500K of equity. Warrants allow lenders to participate in upside if your company succeeds, which is part of why they can offer better terms than traditional bank debt.

Most venture debt lenders require some institutional backing typically a recognized VC fund as a lead investor. The lender is partially underwriting on the credibility of your investors and their implied ability to support the company in future rounds. Some venture debt providers work with revenue-based financing for companies without institutional backing, but traditional venture debt terms (low rates, large amounts) are generally tied to institutional investment.

Venture debt is secured debt in a failure scenario, lenders have priority over equity holders and can claim company assets. If the company is winding down, lenders would be repaid before investors or founders see any recovery. This is different from equity investors lose their investment but don't have a claim on your assets personally. Venture debt providers typically include covenants (financial requirements) that trigger early repayment discussions if your business underperforms significantly.