Video: Why Venture Lenders Ask for Equity Investment Rights?
A lot of times venture lenders, they’re smart. They know when they find a good deal when they’ve done a loan with a good startup, they want to get a little piece of the equity too.
They want to invest extra capital above and beyond the warrant coverage into your company. A lot of times the venture lender will say, “Hey, we want to invest another million dollars in your next round of capital.” That sounds great and it’s wonderful of them to participate and help your company but the hidden problem with that is it can really mess up the pro rata ownership in the next round.
Most venture capital back companies that the next lead is going to take 20% of the company’s ownership. Oftentimes the participated, the people that are already invested in the company, are going to want to maximize their ownership as well.
Oftentimes there’s a little bit of a rugby scrum trying to figure out who’s going to get the exact ownership when the new round comes together and trying to fit a venture lending firm in that wants to invest a million dollars can really mess up the pro ratas.
Therefore, our best advice is to try to cut that down to 50K, $100,000, maybe even $200,000, but you don’t want to commit to letting the venture lender invest too much equity in the next round because it can really mess up the cap table when the next round comes together.