Term sheet overview
A venture debt term sheet is a document provided by a venture lender, and contains the terms and conditions for a venture loan. The term sheet is nonbinding, and summarizes the main points of the loan. Once your startup receives a term sheet, you can (and should!) negotiate terms before you sign the term sheet. To help our clients understand the term sheets they receive, we’ve create a sample sheet. For explanations of the different clauses, click on the “i” icon next to that section.
Note: this sample venture debt term sheet is provided for educational and informational purposes only. Companies raising funding should always work with an experienced attorney and CPA, and should not rely on this venture debt term sheet for actual legal or accounting advice.
To meet the financing needs of STARTUP (the “Borrower”), LENDER (“Bank”) would like you to consider the financing proposal described in this proposal letter (the “Proposal”).
A term facility (the “Term Loan Facility”) in the amount of $5,000,000 (the “Term Loan Commitment.”)
$5,000,000 fully available to be drawn at Close through the interest-only period.
Facility will have an interest only period for twelve (12) months from the Closing Date. Upon Borrower achieving the Milestone Event, interest only period to be extended to fifteen (15) months from Close.
Milestone Event defined as Borrower achieving trailing 3 month (T3M) GAAP revenue of no less than $5,000,000.
Following the interest only period, the term loan balances will amortize ratably over thirty-six months. Upon achieving the Milestone Event defined above, facility shall amortize ratably over thirty-three months.
4 years from Closing Date.
WSJ Prime*+1.00%, floating. The interest rate shall be subject to a floor of 5.75%.
Interest shall be payable monthly, upon any prepayment due to acceleration and at final maturity.
A closing fee equal to 0.50% of the Term Loan Commitment Amount fully earned and payable at Closing.
Borrower may elect to retire the Facility in its entirety at any time by paying the outstanding principal balance, unpaid accrued interest, applicable Final Payment, and a Prepayment Fee. The Prepayment Fee shall be 3.00% of the outstanding principal balance if paid before the first anniversary of Loan Closing, 2.00% if paid after the first anniversary but before the second anniversary of Loan Closing, and 1.00% thereafter. Prepayment Fee shall be waived if Facility is refinanced by Lender.
6.00% of the Advanced Amount, due upon the earlier of Maturity or termination of the Facility.
Approximate IRR or “all-in” cost of capital of ~8.90% to include a floating rate of 6.75% (WSJ Prime - 4.75%) and a Final Payment of 6.00% due upon the earlier of Maturity or termination of the Facility.
First priority lien on all assets with a negative pledge on intellectual property.
No Financial Covenant until Borrower has drawn $2,500,000 or greater on the Term Loan Facility. Once Borrower exceeds $2,500,000 in debt outstanding on the Term Loan Facility, Borrower will be subject to the Financial Covenant below:
Borrower to be subject to a trailing 3 month revenue covenant, tested monthly, equal to 60% of the latest BOD approved Operating Budget provided to Lender for FY’22 and FY’23. Specific levels to be documented in final documentation. For 2023 and thereafter, covenant levels to represent 60% of the latest BOD approved Plan provided to Lender and shall, in all cases, require minimum YoY growth rates of no less than 25%.
The Borrower and all subsidiaries guarantee all of the indebtedness, obligations and liabilities of the Borrower and its subsidiaries arising under or in connection with the Loan Documents and in connection with bank product obligations owed to the Lender and its affiliates.
If the Lender determines in its sole discretion that the Borrower’s investors will no longer financially support the Borrower, the Lender may declare an Event of Default. The Lender does not have to advance additional funds in the event of a Material Adverse Change.
Delivery of company prepared monthly and annual audited financial statements, monthly compliance certificates, annual projections, board materials, and other information requested by the Lender.
The Lender shall be the Borrower’s principal depository and disbursement bank, and shall conduct all of its primary banking business with the Lender, including, without limitation, commercial credit cards and letters of credit (other than currently issued letters of credit and any renewals thereof), primary deposits and excess liquidity.
Upon close, Borrower shall grant to Lender a warrant to purchase Borrower’s Common Stock equivalent to 25bps Fully Diluted Ownership, of which 12.5 bps shall vest at close, and 12.5 bps shall vest upon the initial advance. Warrant shares shall price at the latest 409a valuation.
The Warrant shall be issued on Lender’s standard form and will:
The Borrower shall pay all reasonable out of pocket expenses of the Lender associated with the negotiation and closing of the Facilities.
Please indicate your acceptance of this proposal by signing the space indicated below, delivering the Initial Deposit, and returning an executed copy to us by 5:00 p.m. on XX/XX/XXXX, after which time this Proposal expires.
We appreciate the opportunity to present this Proposal and look forward to working with you.