The second option is to raise venture debt with a 10% warrant coverage*. By doing so, however, they give up an additional 4% in equity. The first option on the table is to raise an additional $2 million from venture capital investors at the same valuation of $50 million. What should Company A do about the remaining $2 million? The company successfully raises $10 million from a venture capital firm at a $50 million valuation for 20% equity. Learning Checkpoint #1: Reducing the Average Cost of Capital with Venture DebtĬompany A wants to raise $12 million in order to achieve its next growth milestones – expanding its product line and investing in sales and marketing. If Your Investors Are Not SupportiveĪlthough venture debt is a great option for venture capital investors to use within their portfolio companies to reduce dilution, you should avoid raising it if you do not have the approval of your existing investors or board. From there, you can get a sense of the company’s financial position if it were to raise a round of venture debt. If the Terms or Covenants Are Too Heavyīefore agreeing to a venture debt loan, you should have someone on your team model the cost of the debt and understand the impact of any covenants on the company. You should only raise venture debt if you know your company has sufficient cash flow to service the debt or if you are confident you can raise another round of equity in the future to repay the loan. Is considering debt as a last resort for funding.Signs your company may not be ready also include: If you don’t think your company can repay the interest payments, you should not raise venture debt. When Not to Raise Venture Debt If You Can’t Repay
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