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TAG: Debt

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Issuing Warrants. Preferred or Common?

TheFunded.com Discussion

Posted by Anonymous on 2009-02-26

Tags: Funding Sources Convertible Debt

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Convertible Notes in This Market

TheFunded.com Discussion

Posted by Anonymous on 2009-02-24

Tags: Funding Sources Convertible Debt

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Terms of a Convertible Promissory Note

TheFunded.com Discussion

Posted by Anonymous on 2009-02-21

Tags: Funding Sources Convertible Debt Terms

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How's the Venture Debt Market Looking These Days?

TheFunded.com Discussion

Posted by Anonymous on 2009-02-17

Tags: Funding Sources Venture Debt

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National Venture Capital Association President Admits They are Going After Small Business Programs

TheFunded.com Discussion

Posted by Anonymous on 2009-02-09

Tags: Venture Business Debt Government

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Sba Micro Loan

TheFunded.com Discussion

Posted by Anonymous on 2009-01-23

Tags: Funding Sources Debt Government

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Sba Loan

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Posted by Anonymous on 2009-01-21

Tags: Funding Sources Debt Government

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Debt Financing?

TheFunded.com Discussion

Posted by Anonymous on 2009-01-08

Tags: Preparation Convertible Debt

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Pay Off Convertible Debt?

TheFunded.com Discussion

Posted by Anonymous on 2009-01-05

Tags: Operations Convertible Debt Payment

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Venture Debt Pros and Cons in the Current Situation

TheFunded.com Discussion

Posted by Anonymous on 2008-12-12

Tags: Preparation Venture Debt

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A Round Valuations Down 25 50% While B and C Rounds Non Existent

TheFunded.com Advice

Posted by fnazeeri on 2008-12-10

Tags: Venture Business Valuation Venture Debt Convertible Debt

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More here.

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How Much Debt is Too Much Debt"

TheFunded.com Discussion

Posted by Anonymous on 2008-11-21

Tags: Operations Debt

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Legal Requirements for Seed Round Convert. Debt Funding

TheFunded.com Discussion

Posted by Anonymous on 2008-11-13

Tags: Preparation Lawyers Convertible Debt

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Terms on Convertible Debt

TheFunded.com Discussion

Posted by Anonymous on 2008-11-05

Tags: Negotiation Convertible Debt Terms

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How Common are Bridge Loans?

TheFunded.com Discussion

Posted by Anonymous on 2008-09-08

Tags: Preparation Convertible Debt

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Convertible Note: Discount vs. Warrant Coverage

TheFunded.com Discussion

Posted by Anonymous on 2008-08-07

Tags: Preparation Convertible Debt

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Debt Financing Backed Only by Awarded Patents

TheFunded.com Discussion

Posted by Anonymous on 2008-07-09

Tags: Preparation Debt

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Bridge Financing Options

TheFunded.com Discussion

Posted by Anonymous on 2008-07-07

Tags: Preparation Convertible Debt Bridge

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5 Reasons Convertible Debt Sucks

TheFunded.com Advice

Posted by fnazeeri on 2008-06-20

Tags: Preparation Convertible Debt

PUBLIC:

I just posted this over on my blog [http://tinyurl.com/3n4wsz] but figured some folks might be interested here as well.

There are two scenarios where convertible debt is typically used: bridge financing and angel financing. I've raised convertible debt a few times and I have to say that in most angel funding scenarios it sucks as a way to finance a startup (I think it's okay for bridge funding, but I'd avoid that too if possible). Why"

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Venture Debt for Startups

TheFunded.com Advice

Posted by fnazeeri on 2008-05-26

Tags: Operations Venture Debt

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I always thought it was crazy for early stage companies to take on venture debt. Here's a company that just raised $5MM of venture capital, is burning $300K per month and they think it's smart to raise debt"!" I admit that my view is colored by my one experience raising venture debt in 1999 which did not end well (for anyone). So recently, I decided to take a look at venture debt and talked to about a dozen lenders, quite a few startups and some other industry experts. To my surprise, I found that in some cases, it does make sense.

First, a bit about venture lenders. Various estimates put the number of firms that have serious venture lending businesses at 20-30 in the US. My take is that there are three categories of lenders: (1) banks, (2) dedicated funds with "stable capital" and (3) dedicated funds without "stable capital." By stable capital, I mean a fund that raises capital from limited partners similar to a venture capital fund. The capital is committed for a specific period of time (like 5 or 7 years or more). Bank-backed venture lenders are regulated and tend to invest in less risky areas (like capital equipment or receivables financing). Dedicated funds tend to be more aggressive and invest in "growth capital" (more on this later). The permanency of capital is an important factor as this can have an impact on the borrowers stability of capital and the willingness of a lender to work with the borrower should the company hit a rough patch.

For startups, there are three main types of venture debt: (1) equipment financing, (2) receivables factoring and (3) growth capital. There are other types of borrowing (e.g. acquisition financing, but I'm focusing on these three categories for now). Equipment financing is borrowing tied to a specific capex purchase, e.g. building out a NOC. Receivables financing is useful for companies that have material A/R against which they can usually borrow as much as 80-85%. Growth capital (also referred to as "stretch equity") has availability tied to venture metrics and is useful when the startup can use the extra capital to reach specific business benchmarks beyond those achievable with equity financing alone and that will provide a material step up in valuation (or insurance that they meet those already committed to).

Some key terms/rules-of-thumb for venture debt include:

* Availability: A/R factoring - up to 85% of receivables; equipment financing - up to 100% of specific capex; and growth capital - up to the cumulative amount of capital invested by the lead investor (minus any other debt).

* Repayment: 3 to 12 month interest only period followed by up to 36 month interest plus amortized principal period (i.e. up to 48 months).

* Rates: For working capital financing, a good rate would be prime +1% and for growth capital, a good rate would be prime +3%.

* Warrants: Expect 6-12% warrant coverage on growth capital. That means take 6-12% of the loan principal and convert that into an at-the-money warrant to purchase an amount of shares at the price of the last equity round.

* Covenants: With growth capital, you can avoid them (including a "MAC" clause), however, most working capital loans will have them.

The process for raising venture debt is straight forward. The borrower will require some material (which you probably already have from raising your last equity round) including:

* Powerpoint pitch deck
* Financials since inception
* Current cap table
* Board approved forecast
* 1-hour meeting with the CEO to get the "pitch"

After reviewing the materials and the initial meeting above, a lender will issue / negotiate a term sheet. Once accepted, that will be followed by a half-day diligence meeting with the management team, legal documentation and closing. The whole process typically takes 4-6 weeks from term sheet to close.

So in terms of who to borrow from, my assessment is that banks will offer the best price but on the least favorable terms. The dedicated funds will offer the most flexibility, but will cost more. Consequently, I'd go to banks for equipment or receivables financing, but to the dedicated funds for growth capital. If you think you'll need both (i.e. both equipment/receivables financing as well as growth capital), I'd go to the dedicated funds for growth capital first and then work w/ banks to get additional financing later.

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Best Sources for Startup S Imple Debt or Convertible Note?

TheFunded.com Discussion

Posted by Anonymous on 2008-05-24

Tags: Funding Sources Debt Convertible Debt

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How to Handle a Situation Where a VC Has Reneged on a Commitment to Support the Company

TheFunded.com Discussion

Posted by Anonymous on 2008-05-09

Tags: Operations Crisis Rejection Convertible Debt

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Convertible Debt: Looking for Feedback on Terms

TheFunded.com Discussion

Posted by Anonymous on 2008-05-09

Tags: Negotiation Debt Convertible Debt

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Debt Rates

TheFunded.com Discussion

Posted by Anonymous on 2008-05-09

Tags: Negotiation Debt Convertible Debt

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Debt to Equity Investments

TheFunded.com Discussion

Posted by Anonymous on 2008-04-25

Tags: Funding Sources Convertible Debt