Venture Debt: Warrant Coverage Upfront or On Usage

Thu, 15 March 2018 - Scott Orn

Video: Should the Warrant Coverage be Based on Usage or Commitment in a Venture Debt Deal?

Let’s talk about warrant coverage in a venture leaning deal, and whether the warrant coverage should be based on usage or commitment.

Now, the lenders are making a commitment to the startup. They’re going to let the startup drawn down a bunch of money, and so of course, they want the warrant coverage, the equity component, to be based on commitment. They made the commitment to you, they’ve done their job as far as they’re concerned, so they would like that equity upfront.

Not the startup, if they’re savvy, would try to negotiate this. The startup may want to make it based on usage, or how much they draw down. That way, if they only draw half of the loan or a quarter of the loan, they’re not paying the full warrant coverage.

Now in practice, what usually happens is the two parties meet in the middle, and half of the total warrant is based on commitment, and half of it is based on usage. So say your warrant in your venture debt deal is 8% of the total deal amount. Probably 4% of that would be based on commitment, and 4% would be based on usage. That way, if the startup only draws a little bit of a down, you’re only paying minimal warrant coverage.

 

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