The idea behind a final payment is that the lender will backload some of the interest.
So maybe your interest rate is anywhere between 5-10% for the course of the loan, you pay that every month, along with some principal. And then at the end of the loan, on your final payment, you include some extra interest.
Now, the logic behind this is that, when a startup is early in its days, it’s raising money at low valuations, so the money’s very expensive in terms of dilution. But if all goes to plan, it’s gonna be raising money at much higher valuations down the road.
So, when you make that final payment of backloaded interest, three or four years into the loan, you’re actually doing it out of cheaper equity dollars, lower dilution dollars. So it’s a win/win. For the startup, they’ve gotten to defer those payments, and pay it out of cheaper equity dollars, and for the lender, they’re still hitting their target rate of return, and so they can afford to continue to make these loans to risky startups.
So it’s a win/win. We highly recommend to startups to backload as much interest as you possibly can, in the form of a final payment.
If your startup is raising venture debt, or is interested in raising venture debt, you should visit Kruze Consulting’s Venture Debt information page to learn more about key venture debt terms and provisions. Additionally, our video on how to raise venture debt may be of interest.
Need an accountant for your startup? Kruze Consulting is a leading accounting firm working with seed and venture funded Delaware C-Corps. Kruze Consulting provides all things Accounting and Tax, including interim CFO Consulting, financial modeling, annual taxes, R&D tax credit studies, venture debt consulting, 409A reporting, bookkeeping. Contact Kruze today!
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