Eager to have the cash in their bank account, XYZ draws down the $5m, bringing XYZ’s cash balance to $11.5m. The company talks to a few investors and venture debt providers and decides that venture debt is the cheapest cost of capital and chooses the following debt deal:Ĭeteris paribus, this looks like a great deal. Because their existing cash will only last for another 13 months, they start looking into their financing options. Given these assumptions, XYZ will need $10.25m to turn CFP. XYZ wants to keep spending money on marketing, head count, etc, so they expect their burn over the next 18 months to average around that $500k mark, after which they expect to quickly turn cash flow positive (CFP) in 6 months. Now let’s take an example company: let’s say Company XYZ has $6.5m in cash on their balance sheet and is burning $500k per month right now (13 months of runway). lawyer fees for the company and the bank) Warrant coverageAny transaction costs (i.e.The repayment period (how long the company has to pay back the principal).The drawdown period (how long you have before you need to drawdown the loan).The interest rate (and occasionally, an interest only period).Most venture debt loans have only a handful of terms: (Disclosure: I work in VC, so ostensibly I’m incented to criticize venture debt and elevate equity.) I’ll try to explain why here, and will also try to illustrate which terms you should push hardest for in your negotiation to get the best venture debt deal. In fact, sometimes the true cost of capital for venture debt can be a multiple of the interest rate. Why not raise $10m now at a 14% interest rate, rather than raise $10m in equity at today’s valuations and dilute existing shareholders by 25+%? 14% sure does seem like a low cost of capital.īut it’s not always correct to equate the cost of capital for venture debt with the debt’s interest rate. With venture dollars so few, interest rates so low, and venture debt providers so many, venture debt seems like a no-brainer decision to extend a company’s runway. Limited partners contribute to the funds pro rata, meaning that their contribution during the capital calls are proportional to the total capital committed to the fund.Given the current financing environment, it’s not surprising that many startups are thinking about raising venture debt for working capital. The amount of paid in capital that has been invested is referred to as “invested capital”. The cumulative amount of capital that has been drawn down is called “paid in capital”. It is the act of transferring the promised funds to the investment target. A drawdown (aka capital call) is the legal right of a private equity firm to demand a portion of the committed capital from the limited partners to pay for a newly identified investment or expense. The full capital commitment is rarely invested immediately and is drawn down over time as more investment opportunities are identified. This is money that investors have promised to contribute to the fund in order to purchase an asset or fund any expense. In private equity, money that is committed by limited partners to a private equity fund is referred to as committed capital.
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