--- title: "Venture Debt | Altss Glossary" description: "Venture debt is a loan, usually senior secured and amortising, to a venture-capital-backed company with little or no positive cash flow, underwritten…" canonical: "https://altss.com/glossary/venture-debt" --- Glossary · Security / instrument # Venture Debt Also called: venture lending · venture loan Venture debt is a loan, usually senior secured and amortising, to a venture-capital-backed company with little or no positive cash flow, underwritten mainly on its equity backers and ability to raise further rounds, with warrants for equity upside. Publisher: Altss LLCContent modified 2026-10-01 ALTSS-CREDIT-032 A startup that has just raised equity can often borrow a smaller amount on top of it. The lender is betting less on today's cash flow and more on the company reaching its next funding round or a sale, and it takes warrants to share in the upside. For the founders and investors, the loan extends the runway with less dilution than raising the same amount of equity. ## How a venture loan is structured Terms are negotiated loan by loan; the features below are common market practice. - **Tenor**: a term loan, sometimes with a delayed-draw period and an initial interest-only period, then fully amortising to maturity. - **Security**: usually senior and secured on the company's assets, often including its intellectual property (IP). A lender that does not take a lien on IP may instead take a negative pledge (a promise not to pledge the IP to anyone else) or a contractual right to be paid first from the proceeds of an IP sale. - **Economics**: interest (often floating), an upfront fee, a final-payment or end-of-term fee, prepayment fees, and warrants to buy shares, usually at the most recent round price. Warrant coverage is expressed as a percentage of the loan amount. - **Sizing**: commonly a fraction of the most recent equity round, set by lender policy. ## How it is underwritten The primary repayment sources are future equity rounds or an acquisition, not operating cash flow. Lenders therefore weigh: - the quality and reserves of the venture investors; - cash runway against the loan's amortisation schedule; - revenue traction; - the value of the company's IP if it fails. Documents may include minimum-cash or performance covenants and default triggers tied to material adverse changes or investor support. For companies with substantial recurring revenue, recurring revenue lending sizes the loan on revenue instead. ## Lenders In the US, most venture lenders are banks that specialise in venture-backed companies or dedicated venture-debt funds; in market practice some business development companies also lend. The lenders' risk is correlated with the [venture capital](https://altss.com/glossary/venture-capital) funding cycle: when new rounds become scarce, repayment sources shrink across the portfolio at the same time. ## How companies and investors use it Companies use venture debt to: - extend runway between rounds; - finance equipment or acquisitions; - delay an equity raise to a higher valuation. Investors look at the all-in cost, including warrants and fees, against the [dilution](https://altss.com/glossary/dilution) avoided, and at the covenants and default triggers, which can give the lender leverage over a struggling company. ## Worked example ### Illustrative runway extension A company has $30m of cash and burns $2.5m a month, a 12-month runway. It draws a $20m venture loan with 12 months of interest-only payments. Ignoring interest, cash of $50m covers **20 months** of burn, eight months more than before. The loan then amortises, so the extension is real only if the company reaches its next round or profitability within that window. Examples are illustrative; figures are not market data. ## Not the same as - Recurring Revenue Lending: Recurring revenue loans are sized on a multiple of recurring revenue for later-stage software companies. Venture debt is sized relative to equity raised. - [Convertible Note](https://altss.com/glossary/convertible-note): A convertible note converts into equity. Venture debt is repaid in cash, and its equity upside comes only through separate warrants. - Direct Lending: Direct lending underwrites existing cash flow. Venture debt underwrites the likelihood of future equity funding. ## Common mistakes - Comparing the coupon with equity cost without adding fees, end-of-term payments and warrants. - Assuming the lender will extend when a round is delayed. Amortisation and covenants can force a sale or restructuring. - Treating venture debt as non-dilutive. Warrants dilute, though less than an equivalent equity raise. ## Edge cases - Growth-stage loans to profitable venture-backed companies resemble direct lending and may be classified there. ## Sources - [Debt as Venture Capital](https://illinoislawreview.org/wp-content/ilr-content/articles/2010/4/Ibrahim.pdf). Darian M. Ibrahim, University of Illinois Law Review, vol. 2010, no. 4, pp. 1169-1210, 2010. Status: published (checked 2026-10-01). pp. 1169, 1173, 1179-1180 (incl. nn. 53, 57), 1187-1189 — supports: Venture lenders lend to start-ups without cash flow once VCs have invested, relying on later equity rounds and secondarily on IP; loans are straight debt, sometimes with a draw period and an interest-only period, fully amortised, with warrant coverage expressed as a percentage of the loan; lenders take security interests including in IP, or contract for first priority in IP sale proceeds; venture debt extends runway and reduces dilution, and rises and falls with venture capital - [The Leveraging of Silicon Valley](https://www.nber.org/system/files/working_papers/w27591/w27591.pdf). Jesse Davis; Adair Morse; Xinxin Wang, National Bureau of Economic Research (Working Paper 27591), NBER WP 27591, July 2020. Status: working paper (checked 2026-10-01). pp. 1-2, 9 (n. 12), 10-11 — supports: Venture debt is senior, short-term debt with warrants sized as a percentage of the loan; repayment comes from the next equity round, so lenders assess the VCs; unlike a convertible note it is primarily debt; most US venture lenders are banks or specialty debt funds; it extends runway while limiting dilution - [Patent Collateral, Investor Commitment, and the Market for Venture Lending](https://www.nber.org/system/files/working_papers/w20587/w20587.pdf). Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis, National Bureau of Economic Research (Working Paper 20587), NBER WP 20587, October 2014. Status: working paper; a 2018 Journal of Financial Economics version is reported by search indexes, not opened (checked 2026-10-01). Abstract; p. 1, n. 1; pp. 7-8 (incl. n. 6) — supports: Venture lending depends on the credibility of VC commitments to refinance startups and contracted after a negative shock to VC capital supply; lenders seek repayment from follow-on rounds, consider the salvage value of patents, and usually close just after an equity round; lenders are banks and specialised non-bank lenders ## Related terms 4 terms - [Venture Capital (VC)](https://altss.com/glossary/venture-capital) - [Dilution](https://altss.com/glossary/dilution) - [Convertible Note](https://altss.com/glossary/convertible-note) - [Private Credit](https://altss.com/glossary/private-credit) ## Concept record Concept ID ALTSS-CREDIT-032 Classification Security / instrument · Strategy Topics Private credit · Venture capital & startups Version 2.0.0 Last reviewed 2026-10-01 Structured data [JSON](https://altss.com/reference/concepts/venture-debt.json) ## Canonical URL https://altss.com/glossary/venture-debt