A type of debt financing obtained by earlier stage companies and startups, venture debt is typically used as a complementary method to equity venture financing. This form of debt financing can be provided both by banks specialising in venture lending and non-bank lenders.

Venture debt is a viable alternative to equity venture financing. A primary benefit, similar to other methods of debt financing, is preventing the further dilution of the equity stake of a company’s existing investors, including employees.

It works differently to conventional loans, with the principal amount of debt usually determined using the amount raised in the last round of equity financing. The majority of venture debt instruments involve interest payments, based on either the prime rate or another interest benchmark. In addition, in venture debt financing the lenders receive warrants on the company’s common equity, as a part of the compensation for the high default risk.


Benefits of venture debt