Video: What is a Venture Debt Funding Material Adverse Change Clause?
We talked about MACs as an event of default. You definitely want to avoid those. But almost equally dangerous is the funding MAC.
And what the funding MAC basically is, is at the bottom of the term sheet, in the very fine print, it might say that the lender does not have to advance more money in the event of a material adverse change.
And that’s the lender’s get out of jail free card. That means that if the company is not doing well, they can potentially find an excuse to not advance the rest of the loan.
Now, of course, from the startup, this is terrible timing, because the startup has been planning and depending on that capital coming into the company and so they could find themselves in a very, very tough situation.
Thus, beware of the funding MAC, try to negotiate out of your term sheet and if you can’t get out of term sheet, consider drawing all of the money up front so you don’t ever have to worry about the funding MAC coming into play.