Venture debt

Venture debt is a loan (term loan and/or revolving line) to a venture-backed startup, usually sized off the last equity round, with interest, fees, covenants and often warrants (rights to buy a small amount of equity cheaply). Lenders underwrite your investors and cash runway more than GAAP profitability.

It is not an alternative to having a venture business. It is a complement once equity investors are already in. Pure alternatives sit in bootstrapping, RBF, grants and customer funding.

The big idea

A second mortgage taken right after a large cash gift from relatives is the picture: the gift made the lender comfortable. The analogy breaks in stress. Relatives might forgive. A lender may refuse further draws, force a restructuring, or sit senior to everyone. Equity is wiped first.

Rough pattern as of the mid-2020s (orders of magnitude; shop actual term sheets):

When it helps. You just raised equity, burn is planned, and an extra two quarters materially raise the odds of hitting the next valuation step without selling another 15% of the company.

When it kills companies. You use debt to avoid a needed down round or to fund a hope-based plan with under 9 months of equity runway. In stress, lenders may refuse draws (material adverse change) or sit senior in a bad outcome.

Warrants are easy to shrug off ("only 0.5%") until you stack them across facilities. Model fully diluted ownership including warrant shares. Watch draw windows: if the facility forces you to draw while you still have long runway, you pay interest on cash you did not yet need.

Walking through it

After a $10M Series A, a $3M venture-debt line at interest plus small warrants extends runway from 14 to ~18 months — enough to clear a Series B metrics bar. The same $3M as equity at a weak interim valuation might cost 8–12% of the company. Debt wins if the Series B (or path to profitability) remains credible. If metrics are slipping and equity will be a down round anyway, adding debt first often makes the down round and the lender negotiation harder.

Bank term loans and revolvers are a different product: they usually need collateral, a personal guarantee, or years of profit — more available to bootstrapped profitable businesses than to early startups.

Common mistakes

• Using debt to dodge a down round. You added a senior creditor to a reset you still have to do.
• Ignoring MAC and minimum-cash covenants until the draw is refused.
• Treating 0.5% warrants as free. Stack them. Put them on the cap table.

Check yourself

When is $3M of venture debt better than $3M of equity?

When you just raised, runway is already decent, and the extra months credibly raise the odds of a better next price — so you avoid selling 8–12% now.

Why is debt a bad rescue with under 9 months of equity runway?

Fixed payments and default leverage arrive exactly when you need to negotiate a down round.

Key takeaways

• Venture debt extends runway after equity; it is not a substitute for equity.
• Typical size is a fraction of the last primary, plus interest, covenants and warrants.
• Never use it as the rescue. Supplement, don't replace.

Further learning

16 Things to Know About Raising Debt for Startups (a16z)Raising debt is an important financial tool for startups, especially as more and more companies become fintech companies. Learn how it works.Andreessen Horowitz

Alternatives to venture capital