Legal considerations for high-growth startups: Venture Debt

Peter Petitt, Managing Director at Aon, and Foley & Lardner lawyers Lisa Conmy and Alidad Vakili engaged in an informative panel discussion on venture debt moderated by Bret Waters at 4thly Accelerator as part of the livestream for startup founders series hosted by 4thly and Foley.

The program covered when entrepreneurs can leverage debt from banks or non-bank lenders, how venture debt is structured, and the considerations.

The key takeaways were:

• Venture Debt comes in at the same time as or follows venture equity – best time to raise it is immediately after you raise equity, you have 12-18 months of runway and you can show recurring revenue streams.
• A company needs to have enough collateral, or something that can be used as collateral, such as intellectual property (IP), to consider a debt financing.
• Recurring revenue and IP are common sources of collateral in venture debt deals. Aon looks at IP – the world’s largest uninsured asset class and the world’s most undervalued asset class. A company’s IP portfolio is often its most valuable asset.
• We see companies securing a facility when times are good to enable them to extend runway before the next equity financing so that companies can raise in optimal conditions, and at a higher valuation than they would otherwise.
• It’s important to understand the covenants that are being requested and be careful of which ones align with the trajectory of the company.
• Warrants are a frequently requested sweetener in venture debt deals and are typically exercisable for common stock at a penny exercise price. Be careful of a penny exercise price if the warrants are exercisable for preferred stock.