Venture debt or non-dilutive runway

Venture debt is a loan designed for venture-backed startups that do not yet qualify for a traditional bank loan. It is usually offered after an equity round, sized as a fraction of that round, and repaid over a few years, often after an interest-only period. Lenders typically receive warrants, which give them a small right to buy equity, on top of interest and fees. Companies use it to extend runway between equity rounds with less dilution than raising more equity.

A common rule of thumb is roughly 20 to 35 percent of the most recent equity round, though it varies widely with the lender, the quality of the investors behind the company and whether there is recurring revenue. Lenders underwrite largely on the strength of your equity investors and your runway, so debt is much easier to get shortly after a strong round. Taking only what extends runway to a clear milestone is safer than borrowing the maximum on offer.

Venture debt is underwritten mostly on your equity backing and is usually repaid on a fixed schedule with interest and warrants. Revenue-based financing is underwritten on your revenue, often recurring software or e-commerce revenue, and is repaid as a share of future revenue until a fixed total is reached, usually without warrants. Revenue-based financing can suit profitable or near-profitable companies without venture backers, while venture debt suits venture-backed companies between rounds.

The main risks come from covenants and repayment. Loans can include financial or investor-support covenants, and breaching one can let the lender call the loan early. Repayment continues whatever happens to revenue, so debt shortens runway if growth stalls. Lenders usually take a security interest in company assets, which matters in a sale or wind-down. Read the default and material adverse change clauses carefully, and model repayment in your downside case, not only in your plan.