Orrick, a local law firm, put on an overview of venture debt in late February. I’ve embedded the presentation below for those interested in exploring more about venture debt.
Lines of credit and bridge loans are the most relevant for startups. Lines of credit tend to be completed after raising a round to provide some extra cushion for the enterprise. Bridge loans are for “bridging the gap” between the current state of a business to a key milestone, at which point, another series of money will likely be injected into the company.
There are a few key concepts that are important for venture debt.
- Venture deal is ideally sought immediately after fundraising increase the total amount of capital without suffering additional dilution
- Depending on the market conditions, venture debt may a less expensive way to raise capital, though this is not true today with interest rates ranging from 7-19% and warrant coverages from 8-10%
- Intellectual property shouldn’t be used as collateral.
- As with all transactions, it’s important to keep transaction costs to a minimum.