Today we’re talking about events of default in venture debt.
Now an event of default is when you get put in the penalty box and the lender controls your destiny. They can make you fundraise. They can make you sell the company. You do not want to be in default. So, stay out of default is rule number one.
Rule number two always make sure the events of default are listed in the term sheet. A lot of lenders they get a little sneaky and don’t put it in the actual term sheet even though it’s the most important things. So, make them put events of default in the term sheet.
Now, a couple of common events of default are insolvency or non-payment.
Of course, if you don’t pay your loan, you’re going to be in default. Insolvency is when you don’t have enough money to pay your bills. That usually comes into play at the very very end of a startup, it’s not a huge deal. The ones you want to be very careful of are investor abandonment or material adverse change. Those can be used aggressively against a startup to create a default situation. If your investors refuse to put more money in the company that can be an event of default if there’s a big material change in the investment climate or economy or something like that, that could be material adverse change you want to be very careful and negotiate those out whenever possible.
Another less known event of default is when you have a material contract breach or you get sued something like that, that’s a little off the wall, you will have something in your documentation that creates a dollar threshold on those off the wall type of defaults. You want your lawyers to push that dollar amount as high as possible so that little lawsuits or little things don’t trigger an event of default.
If you’re a Series A company ideally that threshold would be a $150,000 to $200,000 that way if it’s a small lawsuit for $20,000, it’s not going to trigger an event of default.
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