What Founders Need to Know About Venture Debt Term Sheets: Part i


While term sheets are popularly seen when acquiring venture capital, term sheets exist for venture debt as well. A venture debt term sheet is slightly different than a term sheet for venture capital, because it is debt financing and requires different terminology.

What are Venture debt term Sheets?

Venture debt term sheets are non-binding agreements between investors that are lending capital and borrowers, typically startup founders. They state the basic terms and conditions of the agreement. Its purpose is to act as a template of expectations for a legally, binding agreement later. Once both parties agree or negotiate the terms to agreement, the binding agreement is written up as a legal contract.

The Anatomy of a VD Term Sheet

There are many sections included in a term sheet. Not every section of a venture debt term sheet is listed below, but these are some of the most important sections to consider when acquiring venture debt.

The term sheet will begin with the financial institution providing the capital and the amount provided. The availability of the debt will be stated, which is the period of time that you can draw capital. Draw periods are typically anywhere between 0 to 18 months. The amortization period is the length of your repayment period. This is usually structured in equal installments like a typical bank loan. The interest rate will also be included as expected, which is the rate you pay on the amounts that you borrowed. This rate can either be fixed or floating. The final payment is similar to a buyback option. This payment is made regardless of how quickly you pay everything off. Paying everything off earlier could lead to the debt being more expensive for you. The prepayment penalty is a premium that you have to pay if you pay everything off too early. Lenders use this to make the deal worthwhile for them by securing predictable levels of compensation. The right to invest section gives the lender a right to invest in another round of financing if applicable. Collateral secures the debt by offering your company’s assets as compensation if you default. Finally, the Materials Adverse Change clause is included at the end. While this isn’t seen as much in venture debt term sheets, it’s still important for founders to note because it allows lenders to call the loan if they aren’t confident in your repayment. Don’t be afraid to dispute this clause, because it is rarely used.

Term Sheets Are Not Set in Stone

Remember that a term sheet is a non-binding agreement, so the terms are still up for negotiation until a written contract is made. Don’t feel pressured to agree with everything on a term sheet if it doesn’t make sense for your company. If you’re not a bind for capital, there are other options available to you that can be suitable for your company.

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