The Borrower's Guide to Venture Debt Finance

Carsted Rosenberg publishes a practical guide for founders and early-stage companies considering venture debt as a complement to equity financing.

Copenhagen and Frankfurt – Carsted Rosenberg has published "The Borrower's Guide to Venture Debt Finance", authored by Dr. Andreas Tamasauskas.  

The guide addresses a specific gap in the funding lifecycle. The point at which a venture-backed company needs further capital, but the dilution associated with another equity round has become unattractive, and the company remains EBITDA negative, making conventional bank financing unavailable. Venture debt can fill that gap, but it is a supplement to equity, not a substitute for it. As the guide notes, venture debt is senior to equity. If the company cannot raise further equity, it is unlikely to attract venture debt either.

The guide covers the following areas:

• Who provides venture debt. The guide distinguishes three categories of provider:

  • public institutions (such as Denmark's Export and Investment Fund, EIFO),

  • venture debt funds (which have long existed as a distinct lending category, and which are now also offered by a number of private credit funds that have established dedicated venture debt strategies), and

  • dedicated growth finance departments within banks that disapply the traditional credit matrix to accommodate EBITDA-negative borrowers.

• When venture debt is appropriate. Venture debt is relevant where the company is seeking to finance further growth or bridge between equity rounds, but wishes to limit further dilution. The guide notes that if bank financing is available, it will normally be the cheaper option, as venture debt's flexibility comes at a higher cost of capital.

• The process from initial contact to funding. The guide walks through six stages: initial contact, initial assessment (including the typical information pack a fund will request), term sheet, confirmatory due diligence, documentation and funding. The guide estimates 4 to 8 weeks from initial contact to due diligence, and a further 2 to 4 weeks to closing.

• Typical commercial terms. The guide provides specific market data on pricing: arrangement fees of 2 to 3 per cent, floating interest rates of EURIBOR or SONIA plus a margin of 7 to 9 per cent (or fixed rates of 10 to 12.5 per cent), and a warrant component giving the fund participation in equity upside. The number of warrants is typically set as a percentage of the drawn term loan and priced by reference to the most recent equity round. Tenors are typically 3 to 5 years, with an interest-only period of 12 to 18 months followed by amortisation with a balloon repayment at maturity.

• Security and governance. Full security is standard, typically comprising share pledges, floating charges, fixed security over IP, assignment of intercompany loans and insurances, and group guarantees. The guide also notes that venture debt funds will commonly require board observer status for the duration of the facility.

• Documentation and covenants. Loan documentation is often LMA-based. Financial covenants tend to focus on growth and liquidity metrics rather than the leverage and coverage ratios used in investment-grade lending.

Consult Guide

Consult "The Borrower's Guide to Venture Debt Finance" from our website here or download below:

Borrowers Guide to Venture Debt Financing.pdf

Download PDF • 27.43MB

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Further Information

For more information on banking or capital markets transactions in Denmark, please contact Dr. Andreas Tamasauskas or Michael Carsted Rosenberg at Carsted Rosenberg.

This briefing is intended to provide general information on corporate finance in Denmark It is not intended to provide definitive legal or tax advice. No legal, tax or business decisions should be based solely on its content. The briefing does not necessarily deal with every important topic and is not designed to provide legal or other advice. It shall not be used as a substitute for legal advice and none may be inferred. It is only intended for general information on matters of interest. While we endeavour to represent the information as accurately and correctly as possible, we cannot accept any responsibility for any errors or omissions.