Boards and Venture Debt (I/II)

How to secure a pre-agreed Venture debt financing in front of your Board of Directors. Less is more.

As a Venture debt investor, I’ve faced an important number of awkward situations in Board Meetings (as an observer! -as you may remember Venture debt does not have any voting rights-). During Boards time is a scarce resource, and you rather stick the discussion to the business.

Unfortunately, Venture debt is rather a complex form of financing which includes a tailored interest, amortization and equity remuneration (see Venture Debt 101). Not to mention, the headache of trying to compare different Venture debt Term Sheets.

Simplify the terms and conditions of the loan. People often get stuck in non-critical aspects of the financing, try to show-up the big picture.

A typical Venture Debt Term Sheet could include: (i) Multiple tranches, (ii) a dynamic valuation (i.e. discount to round, time-weighted average) and (iii) Covenants & Collateral implications.

There are hundreds of possible scenarios, choose a base case to present to your board and be concise about the agreed terms and conditions.

Facts and figures of the items in the loan should be at the top of your one-pager.

Valuation is always an issue. Venture debt is much less dilutive than equity. Be sure that everybody on the table understands the Equity capital savings.

From the example above - €2m ticket at €8m Eq. Value would imply a 20% dilution (€2m÷(€8m+€2m) with Equity Capital and only 6% with the use of Venture debt (€2m x 25%= 500k ; €500k÷€8m= 6%)

Venture debt is an alternative to Venture Capital, not Banks

Bear in mind that Venture debt is unknown to most people, your Board members are no exception. At some point, someone will play the wise guy and benchmark Venture debt with Bank financing (here is quick answer!).

As a reminder Venture debt should be a replacement to Equity and not Bank debt.

Lenders may protect themselves with clauses. You should be well acquainted with the implications of the Covenants and Collateral.

As an example, Maximum debt capacity could potentially limit the cash inflows from public funds (i.e. H2020) increasing the blended cost of financing. Pledge on shares could jeopardize a hypothetical refinancing opportunity.

Restrictive covenants could potentially be translated into higher costs.

Focus on opportunities and risks

Onboarding a Venture debt lender is an important milestone, you should back your speech with major reasons. Be crystal clear about the extended runway of the proposed Venture Debt and the expected increase in Valuation given the dilution (vs. Equity Capital).

Breakdown of Proceeds — VC vs. VD

Concerning the risks, you should try to determine how bad may you perform in order to miss your repayment obligations (i.e. missing the sales target, churn increase, working capital delay).You should be able to track the performance of these metrics on a monthly basis.

People don’t like what they don’t understand, make it easier for everybody with charts and monthly economics.

  1. The monthly debt burden (principal and interests which will show all monthly installments). Remember your operating Cash Flow should be at least 2x-4x your debt burden in the long run.
From the facility presented above-Maximum monthly installments of €75k

2. The cash profile of the facility (which will help you to see the peak funding of your facility). Tranching is used to reduce interest payments on the unused amounts, it is also helpful to reduce refinancing risk.

Repayment will depend on the number of tranches, grace period and maturity

I strongly recommend to having an open discussion with you Venture debt lender in order to adjust the facility to your company needs.

Venture debt providers will help you structure the deal

You find a template here to draft a your own tailor made proposal.

Once you’ve crunched the numbers and the Board is at ease with the proposal it is time to discuss about the key advantages of Venture debt.



Venture Debt investor @zubicapital. Opinions are my own.

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