Venture Debt Fetch

Simplify Your Startup's Venture Debt Process.

Venture Debt Fetch connects startups to the best banks and lending funds, then analyzes the first term sheet for free!*

Scott Orn, Venture Debt Expert

First Term Sheet Analysis Free!

We can help you through every step of the process: from understanding key terms to getting the best deal.*

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We’ll help you compare existing and new offers from a variety of lenders. You’ll have the freedom and advice to make the best decision for your startup. No information is shared without your consent.

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Venture Debt Industry Expertise


Venture Debt Fetch allows you to compare all aspects of your term sheets. Get insights based on our years of debt & lending experience. Choose the perfect venture debt offer that aligns with the needs of your startup.

Lenders Lender A Lender B Lender C
Rate 5.85% 6.15% 12.25%
Investor Abandonment Clause
Funding MAC
Minimum Cash Requirement
MAC as Event of Default
Prepayment Penalty
Equity Investment Option

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Venture Debt Lenders

By clicking the card you can choose the lenders you want to contact.

Triplepoint

Avg. Check Size:
Company Structure:
Publicly Traded Business Development Corporation
Capital Base:
Public Market Capital & Debt
Contact Person:
Aaron Tyler
Website
http://www.triplepointcapital.com/

Summary

TriplePoint Capital is a Sand Hill Road-based global financing provider to high growth venture capital-backed companies throughout their lifespan, providing customized debt financing, leasing, and direct equity investments. TriplePoint provides unparalleled levels of creativity, flexibility and customer service to serve as the primary debt financing provider for leading venture capital-backed companies in the technology, cleantech and life sciences sectors and is the only debt provider equipped to meet the unique needs of high growth venture-backed companies at every stage of their development.

Western Tech Investment (WTI)

Avg. Check Size:
Company Structure:
Private Fund
Capital Base:
Insitutational Investors including Pension Funds & Endowments
Contact Person:
Patrick Lee
Website
http://westerntech.com/

Summary

For more than 30 years, WTI has provided venture debt, a minimally dilutive form of growth capital, to high-growth public and private companies, including 3PAR, Ablation Frontiers, BeVocal, Brocade, Cerent, Facebook, Google, IDEC Pharmaceuticals, InvenSense, Juniper Networks, Neutral Tandem, Postini and Youku.com.

Hercules Capital

Avg. Check Size:
Company Structure:
Publicly Traded Business Development Corporation
Capital Base:
Public Market Capital & Debt
Contact Person:
Cristy Barnes
Website
http://www.htgc.com/

Summary

Hercules is the largest non-bank lender to venture capital-backed companies at all stages of development in a broadly diversified variety of technology, life sciences, and sustainable and renewable technology industries.

Horizon Technology Finance

Avg. Check Size:
Company Structure:
Publicly Traded Business Development Corporation
Capital Base:
Public Market Capital & Debt
Contact Person:
Mishone Donelson
Website
http://horizontechfinance.com/

Summary

Horizon Technology Finance Management LLC is a venture lender that offers growth-oriented loans to emerging technology, life science, healthcare information and services and cleantech companies. Horizon has provided over $1.3 billion in loan commitments.

Comerica

Avg. Check Size:
Company Structure:
Publicly Traded Bank
Capital Base:
Customer Bank Deposits
Contact Person:
John Benetti
Website
https://www.comerica.com/

Summary

With more than two decades of experience, the Comerica Technology and Life Sciences Division has a thorough understanding of the specific banking needs of technology and life sciences companies. Comerica’s dedicated specialists also know the unique challenges entrepreneurs face and work one-on-one to create proactive banking solutions that fit individual needs. We’ve also developed relationships with top-tier investors who hold vested interests in funding start-up and emerging companies like yours.

Silicon Valley Bank (SVB)

Avg. Check Size:
Company Structure:
Publicly Traded Bank
Capital Base:
Customer Bank Deposits
Contact Person:
Patrick Johnson
Website
https://www.svb.com/

Summary

"Silicon Valley Bank has the industry expertise to manage credit risk while supporting our technology, life science, premium wine and venture capital clients.Silicon Valley Bank has the industry expertise to manage credit risk while supporting our technology, life science, premium wine and venture capital clients. With nearly 30 years consistently focused on companies in the industries we serve, we have an unparalleled understanding of business cycles of companies like yours. We've stood by our clients through dramatic market cycles and transformational technology eras. "

Bridge Bank

Avg. Check Size:
Company Structure:
Publicly Traded Bank
Capital Base:
Customer Bank Deposits
Contact Person:
Mike Lederman
Website
http://www.bridgebank.com/

Summary

Bridge Bank was founded in the highly competitive climate of Silicon Valley in 2001, and continues to provide a full suite professional business banking services. From the very beginning, our goal has been to offer small-market and middle-market businesses from across many industries a better way to bank. A less bank-like way to bank. In June 2015, Bridge Bank merged with Western Alliance Bancorporation.

Pacific Western Bank

Avg. Check Size:
Company Structure:
Publicly Traded Bank
Capital Base:
Customer Bank Deposits
Contact Person:
Laurie Lumenti Garty
Website
https://www.pacwest.com/

Summary

Through a robust community development program, Pacific Western Bank has a long-standing history of supporting local communities. We actively work to improve the well-being of those we serve by committing financial and human resources throughout the state of California and beyond.

Trinity Capital Management

Avg. Check Size:
Company Structure:
Capital Base:
Contact Person:
Ron Kundich
Website
www.trincapinvestment.com

Summary

Lighter Capital

Avg. Check Size:
$2,000,000
Company Structure:
Private Fund
Capital Base:
Contact Person:
Jon Prentice
Website
https://secure.lightercapital.com

Summary

Royalty Based financing vehicle that focuses on SaaS & Recurring Revenue businesses. Lighter Capital is venture capital backed

Level Equity

Avg. Check Size:
Company Structure:
Private Fund
Capital Base:
Contact Person:
Barry Osherow
Website
www.levelequity.com

Summary

Growth Capital in the form of Sub-Debt in the $3-20M range. Focused solely on technology companies.

Vensource Capital

Avg. Check Size:
$750k - $5M
Company Structure:
Funded by CV Holdings, which is ultimately backed by Tricadia Capital (Hedge Fund)
Capital Base:
Hedge Fund Capital
Contact Person:
George Parker
Website
http://www.vensourcecapital.com/

Summary

Data Sales Co.

Avg. Check Size:
$2M - $10M
Company Structure:
An IT leasing company that has been in the business for over 45 years and funded over $3B in originations.
Capital Base:
Contact Person:
Clinton Fuerstenberg
Website
www.datasales.com

Summary

Equipment Leasing Company

CSC Leasing

Avg. Check Size:
$200k - $7M
Company Structure:
Capital Base:
Contact Person:
Kelly Cook
Website
https://www.cscleasing.com/

Summary

Equipment Leasing Company

Signature Bank

Avg. Check Size:
N/A
Company Structure:
Publicly Traded Bank
Capital Base:
Client Bank Deposits
Contact Person:
Philip Korn
Website
www.signatureny.com

Summary

Signature Bank (NASDAQ:SBNY) is a full-service commercial bank with almost $50 billion in assets. The Bank offers single-point-of-contact service that focuses on fulfilling the financial needs of privately owned businesses, their owners and senior managers. Signature Bank’s Venture Banking Group provides commercial lending and deposit solutions for venture-backed companies and their investors. The Group’s experienced team understands entrepreneurs’ unique challenges and needs and is committed to providing the expertise, flexibility and service to take your company to the next stage. Signature Bank is a Member FDIC.

2019 Kruze Consulting
Venture Debt Survey

Market trends and market size analysis

Firms that responded to this survey represent approximately 85% of the US venture debt market, and have close to $23 billion in outstanding venture debt loans - out of the approximately $26 billion in venture debt loans deployed in the past 4 years.

Venture debt is an important, but not well understood, part of the venture funded startup ecosystem, helping startups that have already raised venture capital access cheaper capital to boost their growth and achieve value creation milestones. We believe that this is the largest survey of the venture debt market. Kruze Consulting surveyed startup loan officers and partners at debt funds to understand the size and state of the market, to get information on trends in startup loan deal terms, and to learn about how venture capitalists and startup founders feel about this asset class. The respondents’ firms control well over half of the venture debt dollars in the United States, making this the broadest survey of this important, but not well understood, startup financing vehicle.

Why do startups raise venture debt?

According to the players surveyed in this report, the vast majority of startups that raise venture debt do so to increase their runway to make the startup more valuable at the next round.

This is consistent with the rest of the findings in the survey - the best use of this capital source is for startups that want an additional slug of capital to achieve their goals before raising another venture capital round.

What is the number one reason startups raise venture?

THE US VENTURE DEBT MARKET SIZE

The venture debt market is usually estimated to be roughly 5% to 10% of the venture capital market. In our survey, we asked how large the respondents thought that the market was for the past several years, and asked for a prediction on the market’s size for 2019. Given that our respondents’ funds control the majority of the market, we believe that their collective opinion is a strong indication of the market’s size and growth.

Venture Debt Market Size - $ in Billions

Our respondents predict a record-breaking year for the venture debt market, coming off huge growth in 2018.

We estimate that the US venture debt market was $8.4 billion in 2018, up from $6.5 billion in 2017 - almost 30% year over year growth.

For 2019, the venture debt market is predicted to be $10.1 billion, 20% growth off of 2018, and double what the market was in 2016.

This growth is driven by the hot VC fund raising market, with lenders making more capital available as startup raise more VC funding.

COMPARING THE VENTURE CAPITAL MARKET SIZE TO THE VENTURE DEBT MARKET

Venture Debt vs. Venture Capital Market Size

Comparing the VC market size (using data from PitchBook) to the startup loan market, we can see that the startup lending market follows the trend of the venture equity market, with both markets moving down in 2016 and up in 2017 and 2018.

With PitchBook and other VC industry data sources predicting 2019 to be a record-breaking year for venture capital, the prediction that the startup loan market will reach over $10 billion dollars makes sense.

“2019 is off to a strong start. Our clients are seeing more high quality deals than ever before, mainly driven by the robust venture capital market. I expect that 2019 will be the biggest year in the history of venture debt.”

Scott Orn, Kruze Consulting COO

2019 VENTURE DEBT TRENDS

Trends in deal terms also point to a hot market. Increasing deal sizes, decreasing interest rates and warrant coverage are all indicative of a competitive market, where players are fighting to get into the hottest companies.

VENTURE DEBT DEAL SIZES

Are venture debt deals getting smaller, staying the same or getting bigger in 2019?

Over 70% of our respondents believe that venture debt deal sizes are getting bigger - and none responded that they are shirking in 2019.

Most lenders use a rule of thumb of 20% to 40% debt to equity when committing to a deal. Therefore, as equity rounds get bigger, it’s only natural for the debt deals to get bigger too. Also, lenders are like every other asset manager, bigger deals are better for profits, management fees and carry. Another factor creating larger deals is that the banks in the sector have never been more liquid because they are sitting on the deposits coming in from those huge equity rounds. The final way the hot equity market drives more leverage is that the reward for a startup to hitting their milestones has never been greater in the form of a big up round valuation. A loan gives startups that extra runway insurance that gets them over the hump and makes that big round possible. Why risk falling a few months short of a big milestone when taking debt can get you there?

INTEREST RATES

How do interest rates compare this year to 2018?

Kruze’s venture debt survey is predicting over a 50% chance that rates stay the same or are lower in 2019, which is good for the startup ecosystem.

Stable interest rates are beneficial to startup borrowers because eventually venture loans need to be paid back. Almost every VD loan has a clause that allows the interest rate to float up if rates move up. Rising rates makes it harder for startups to pay back the debt and increase the cost of borrowing. Higher rates also reduce the advantage of taking a little bit of debt over more equity. If the debt gets too expensive, then founders aren’t really saving much with debt and should just take more equity.

Lower interest rates also keep the lenders flush with capital. When Interest Rates are low in the general market (US Treasuries & Foreign Bonds), then capital looks for higher returns in riskier sectors like venture debt. Capital flight to riskier asset classes is one of the reasons the lenders have so much capital at their disposal right now. If rates go up in the broader economy, then some of the capital will flow back into less risky bonds assets and leave venture debt.

INTEREST ONLY PERIODS

We asked if participants are seeing interest only periods shortening, staying the same or growing in 2019 vs 2018.

Interest only periods are the number of months a startup can use the capital without having to pay back any principal.

Eventually venture loans amortize (i.e. the borrower starts to pay back the loan) but the longer a startup can use the capital, the more progress it can make and better it’s next equity round.

When lenders are risk averse, they shorten the interest only period to get paid back faster, thereby de-risking the loan. Everyone of our survey respondents said Interest Only Periods are getting longer or staying the same, not one said they are getting shorter.

This is an extreme sign that the venture debt market is hot.

ARE LINES GETTING USED

Are lines getting used? We asked if the lines are not being used, getting partially used or being fully drawn.

In most instances, startups contract with a venture debt provider for the right to access a loan if they should want it. This is called “drawing down” the line or loan.

When capital is scarce, like in a downturn, most venture debt lines are fully drawn down.

However, in hot equity markets often the next round is preempted by an outside VC firm that “just wants in” and is less sensitive to price.

In our survey, we’re seeing over 70% of the survey participants saying more loans are not being used or getting fully drawn down, which is another extreme sign that the startup market is very hot. Startups have the luxury of not needing the debt capital because equity is so plentiful.

WARRANT COVERAGE

Is warrant coverage down, the same or up vs. 2019?

Warrant Coverage is another method that lenders generate a financial return (in addition to interest). Getting Warrants, or Equity, in the startups gives the lenders huge upside and helps them offset some of the credit losses when startups go under.

When competition is tough for deals, lenders reduce the warrant coverage on the deals - aka reduce the price of the loan - to win the deal. When capital is scarcer, lenders can move warrant coverage up and get a bigger piece of the startup equity.

Less than 10% of the survey respondents are seeing warrant coverage going up, which means the sector is hot and very competitive.

VENTURE CAPITALISTS AND STARTUPS FOUNDER’S KNOWLEDGE OF VD

Venture debt is more complicated than venture capital, and is less well understood by players in the startup ecosystem. That’s part of the reason Kruze offers venture debt consulting - we help our clients make the best use of this for of financing. In this survey, we asked our experts questions about how well startup founders and venture capitalists understood the market.

HOW EDUCATED ARE STARTUP FOUNDERS AND VCS ON VD

Venture debt professionals were asked to rate startup entrepreneurs and venture capitalists education levels on venture debt.

Out of a 10 point scale, with 10 being very educated and 1 being not at all educated, our respondents gave startup entrepreneurs a 4.7 and VCs 6.7.

This suggests that startup founders are not very knowledgeable on venture debt. Anecdotally, this makes sense, as entrepreneurs tend to love venture debt because they don’t have to sell as much of their company’s equity. Because VC’s have pro rata rights, pretty much all dilution comes from founders so it’s natural that they are dilution sensitive.

Entrepreneurs believe in their mission so they don’t dwell on downside scenarios where the company goes bankrupt or the next round of funding is difficult and it becomes hard to pay the loan back. By definition, they have to believe they will hit their plan and raise a big up round. Contrast that with VC’s who have a broad portfolio of startups and see the traditional mix of 20% successful and 80% failure. Therefore, VC’s tend to understand the downside much better than entrepreneurs.

Some of the key misconceptions that our survey respondents had about entrepreneur’s misconceptions of this asset class were:

“Most startup entrepreneurs are not sure about the use of venture debt and the best time to take on venture debt is when you actually don’t need it. Debt providers view the debt as less risky when companies have sufficient cash levels when raising the debt.” Often times companies wait until they are very tight on liquidity and the debt analysis becomes harder. It is easier to raise - and draw down an existing line - when a company is doing well (or has a lot of cash on the balance sheet). Lenders are not in the business of helping failing startups extend their runway, so trying to raise this kind of capital when the company does not have a lot of runway is a mistake. And since most agreements have covenants about the startup is allowed to draw down/access capital from the lender, an entrepreneur will find it harder to get capital from their lender if they wait until the company is close to running out of cash.

“Don’t realize that a MAC or Investor Abandonment gives the lender a lot of control.” These two terms allow a lender to put the startup into foreclosure and take control of the business - never a good thing for the founders and investors. When a lender invokes a MAC (Material Adverse Change) clause, the lender is claiming that something has changed and the borrower will likely not be able to repay the loan. Investor Abandonment means that the lender has asked the existing venture investors to show their continued support of the business, usually by putting more cash into the company, and the VCs have declined.

“The largest debt offer or cheapest debt offer is not always better.” Several of the respondents mentioned some version of this common entrepreneur misconception. In the venture debt market, providers strive to differentiate beyond the size of the check or the interest rate/warrant coverage. Besides the “adding value” to their portfolio companies, different players have different clauses to their loans that can add or decrease the cost of the loan to the startup.

Do startup players think favorably of venture debt?

We asked, on a 10 point scale, with 0 being not at all favorable and 10 being very favorable, what founders and VCs thought of this financing vehicle.

Our findings that Startup Founders tend to like venture debt more than VC’s is consistent with anecdotal evidence in the market.

A big part of this is that Entrepreneurs really dislike dilution while VC’s can always do their pro rata to protect against dilution. So entrepreneurs love any capital that is less dilutive - like loans.

VC’s are more skeptical of venture debt because they have a large portfolio and they can see across the portfolio that sometimes companies don’t make it.

In those situations, Lenders & VC’s have to work through a shutdown or acquisition.

Having a lender in the mix makes downside scenarios more complicated and difficult for everyone - VC’s liquidation preferences are subordinate to the venture loan getting paid back so they are less likely to get their capital back in a downside scenario.

CONCLUSION

The 2019 venture debt market is hot, riding off of a strong 2018 and record-breaking venture capital investments. We expect 2019 to be the largest year for venture debt, with lenders aggressively competing for the best startups - offering larger deals, more favorable terms and moving fast.

Startup founders should take advantage of this hot market to augment their cash balance with less dilutive debt.

However, founders need to remember that debt funds and banks like to invest when a company has recently raised VC or has a strong balance sheet.

They should also pay attention to the specific terms that they are offered during a raise, making sure that the lender’s interests are aligned with their own.

Kruze Consulting’s Scott Orn, a former partner at a major venture debt fund, offers venture debt consulting to help startups make the most out of a fund raise. If you are a venture funded startup, reach out to Kruze to learn more!

Simplify Your Startup's Venture Debt Process

Venture Debt Fetch connects startups to the best banks and lending funds, then analyzes the 1st term sheet for free!*

Venture Debt Podcasts by Kruze

Startup Podcast

Kruze's Founders & Friends Podcast interviews Startup Founders, Executives and Industry Experts to share their journeys, tips, and important lessons.

Venture Debt Posts by Kruze

Kruze Consulting Blog

Some of our latest blog posts on venture debt. Visit all of our blog posts on startup debt .

Free Resource for Startups Raising Venture Capital

Free Resource for Startups Raising Venture Capital

Posted on Tue, 19 March 2019 by Healy Jones, VP of Marketing

Today we're answering the question: Why do VC's prefer to invest in Delaware C-Corporations instead of LLC's or S-Corps.

Read post

Why do VCs like to invest in Delaware C-Corps?

Why do VCs like to invest in Delaware C-Corps?

Posted on Mon, 28 January 2019 by Scott Orn

Today we're answering the question: Why do VC's prefer to invest in Delaware C-Corporations instead of LLC's or S-Corps.

Read post

Venture debt playlist

Watch all Venture Debt Videos from Kruze Consulting

Key Terms

Material Adverse Change Clause (MAC)

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Investor Abandonment Clause

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Prepayment Penalty

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Funding MAC

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Advance Rate on Receivables

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Eligible Receivables or Borrowing Base

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Interest Only Period

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Final Payment

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Growth Capital - Term of Loan

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Acconts Receivable - Term of Loan

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Accounts Receivable Line

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Growth Capital Line

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Lien on Intellectual Property

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Typical Interest Rate on Accounts Receivable Line

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Typical Interest Rate on Growth Capital Line

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Warrant Coverage

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Typical Warrant Coverage on an Accounts Receivable Line

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Typical Warrant Coverage on a Growth Capital Line

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Paid Time Off (PTO) Triggering Insolvency

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Commitment Amount

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Draw Period

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Additional Indebtedness

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Equity Investment Option

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Refundable Committment Fee

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Warrant Coverage Upfront or On Usage

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Why Do Startups Take Venture Debt?

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

4 Reasons to Raise Venture Debt

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

WTI Prepayment Penalty

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Dangers of Venture Debt

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

How Kruze Consulting Helps Startups Get Venture Debt

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Venture Lender's Startup Due Diligence Checklist

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Minimum Cash Requirement in Venture Debt Deals

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

5 Things to do after You Raise Venture Capital

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

VC Liquidation Preferences

In Venture Capital, everyone is playing for the home run outcome. However, in a smaller exit, liquidation preferences allow VC's to get their money back before Common Stock owners, usually Management. Here is a simple example: A startup raises $4M in Preferred Equity with a 1x liquidation preference. When the company is sold, venture capitalists can choose between receiving their original $4M investment back, or converting to Common and participating with all the other shareholders on a pro-rata basis. If they choose the return of investment, then their investment basically functioned as a loan. Liquidation preferences are an important tool for VC's because it mitigates risk. In those scenarios when the startup isn't a huge exit but does get purchased, the VC's get their money back and can distribute the capital back to their Limited Partners. If an investment achieves a big exit, the VC's will almost always convert, thereby forgoing their liquidation preference, so they can participate alongside other investors and management. Liquidation preferences are very common in VC investments. Most of the time, VC's get a 1x preference, but in tough situations, they might ask for 2x or 3x liquidation preference. However, anything more than a 1x is rare. The essence of a liquidation preference is that VC's get their money back in a modest exit. In a big exit or an IPO, VC's will always convert to participate in the big upside.

Average Venture Debt Interest Rates

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Springing Lien in a Venture Debt Term Sheet

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

StandStill or Cooling off Period in Venture Debt

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Average Warrant Coverage on Venture Debt Deal

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Fund Venture Lenders Vs. Bank Venture Lenders

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Venture Lending Common Events of Default

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

Bank Letter of Credit

The big reason why startups use letters of credit is to give their landlord at their new office space a defacto deposit. It's basically collateral for the landlord. And so, what the startup will do will have their bank issue a letter of credit may be for $100,000 maybe for $200,000. The bank will segregate that cash out of the startup's normal operating account, back the letter of credit with that cash, the startup can't touch it anymore because it's backing that letter of credit, and then the bank hands over the letter of credit to the landlord. Now, this is preferred because you're not... You don't necessarily want to transfer a hundred, two hundred thousand dollars to your landlord. and just hope they'll get it back for you. Having the bank on your side, having it documented in a letter of credit is much safer for the startup, and it's much easier logistically. So that's why startups use a letter of credits. There’re a few other reasons like inventory deposits or things like that, but it's almost always used to secure new office space.

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