Venture Debt Guide: When It Makes Sense and When It Doesn't

Venture Debt Guide

Venture debt is a useful tool used badly by many founders. It's non-dilutive on the surface, expensive underneath, and covenant-driven in ways that can force decisions you didn't sign up for. Here's how to use it well.

What venture debt actually is

A term loan (typically 24–48 months) from a bank or specialty lender that sits alongside your equity round. Interest-only period followed by amortization. Backed by IP and typically requires equity investors to be in the round.

When it makes sense

Extending runway between rounds when you have visibility on the next round but want more buffer. Financing working capital when revenue growth is faster than cash conversion. Bridging to an M&A conversation with more optionality than an equity bridge.

When it does not make sense

Companies without a clear path to the next round or profitability. Founders using debt to avoid a down round they should just take. Companies whose primary asset is future revenue that won't materialize on the debt's timeline.

How it's priced

Interest at prime + 3–6%, plus warrants worth 1–3% of the loan amount at the last round's price. All-in cost of capital is typically 12–18% annualized — cheaper than equity but far from free.

Covenants — the real cost

Most venture debt comes with covenants: minimum cash balance, minimum revenue, or a material-adverse-change clause. Breach one and the lender can accelerate the loan or freeze the account. This is where debt turns from friendly capital to existential threat.

How much to take

The common rule: no more than 20–35% of the last equity round. Above that, covenant risk starts to dominate the balance sheet.

When to draw

Right after closing an equity round is the strongest position — lenders are eager and covenants are easiest to negotiate. Waiting until you need it puts you across the table from a lender who knows you're desperate.

Frequently asked questions

Is venture debt really non-dilutive?

Almost. The warrants are small dilution, but far less than an equivalent equity round.

Do I need equity investors' consent?

Usually yes — venture debt typically requires board approval and often sits behind existing investor preferences.

What happens if I can't pay?

Best case: negotiate a covenant waiver. Worst case: the lender can force a sale of the company. Don't take debt you can't cover under a downside scenario.

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