Debt Financing Guide

DEBT FINANCING PHILOSOPHY

Understanding Debt as a Strategic Tool

DEBT FINANCING FUNDAMENTALS

WHY CONSIDER DEBT:
☐ Less dilutive than equity
☐ Extends runway between rounds
☐ Funds specific growth initiatives
☐ Provides optionality
☐ Demonstrates confidence to investors

CEO'S ROLE IN DEBT:
☐ Understand the tradeoffs
☐ Ensure company can service debt
☐ Negotiate terms (not just accept)
☐ Monitor covenant compliance
☐ Build relationships with lenders

THE DEBT REALITY:
"Debt is a powerful tool when used wisely.
It's cheaper than equity if you succeed,
but can accelerate failure if you don't.
Only take debt you can reasonably repay."

WHEN DEBT MAKES SENSE:
☐ Predictable revenue growth
☐ Positive unit economics
☐ Clear use of proceeds with ROI
☐ Runway to repay even if things slow
☐ Not a substitute for needed equity

WHEN DEBT IS DANGEROUS:
☐ Pre-product market fit
☐ Negative unit economics
☐ Unpredictable revenue
☐ Using debt to avoid flat/down round
☐ Insufficient runway if growth slows

DEBT VS. EQUITY DECISION:
Debt better when:
- Growth is predictable
- Need is temporary
- ROI on capital is clear
- Existing investors supportive

Equity better when:
- High uncertainty ahead
- Need strategic partnership
- Cash needs are large
- Risk of covenant breach

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COMPREHENSIVE DEBT FINANCING FRAMEWORK

Debt Financing Guide

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DEBT FINANCING GUIDE
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COMPANY: _______________
Current Stage: _______________
Evaluation Date: _______________

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SECTION 1: DEBT OPTIONS OVERVIEW
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VENTURE DEBT:
┌─────────────────────────────────────┐
│ OVERVIEW:                           │
│ Non-dilutive debt for VC-backed     │
│ companies, typically post-equity    │
│                                     │
│ TYPICAL TERMS:                      │
│ Amount: 25-35% of last round        │
│ Term: 3-4 years                     │
│ Interest rate: 8-15%                │
│ Warrants: 0.5-2% coverage           │
│ Draw period: 6-18 months            │
│ Interest-only period: 6-18 months   │
│                                     │
│ REQUIREMENTS:                       │
│ ☐ Recent equity round (<12 mo)      │
│ ☐ Top-tier VC backing               │
│ ☐ Strong growth trajectory          │
│ ☐ 18+ months runway post-debt       │
│                                     │
│ BEST FOR:                           │
│ • Extending runway between rounds   │
│ • Insurance against slow fundraise  │
│ • M&A bridge financing              │
│                                     │
│ PROVIDERS:                          │
│ SVB, Hercules, Trinity, WTI,        │
│ Western Technology, Lighthouse      │
└─────────────────────────────────────┘

REVENUE-BASED FINANCING (RBF):
┌─────────────────────────────────────┐
│ OVERVIEW:                           │
│ Capital advanced against recurring  │
│ revenue, repaid as % of revenue     │
│                                     │
│ TYPICAL TERMS:                      │
│ Amount: 1-6x MRR                    │
│ Term: 12-24 months                  │
│ Cost: 1.1-1.5x payback multiple     │
│ Repayment: 5-10% of monthly revenue │
│ No warrants typically               │
│                                     │
│ REQUIREMENTS:                       │
│ ☐ $100K+ MRR (varies by provider)   │
│ ☐ Recurring revenue model           │
│ ☐ Growing or stable revenue         │
│ ☐ Access to revenue data            │
│                                     │
│ BEST FOR:                           │
│ • Marketing/growth spend with ROI   │
│ • Inventory or seasonal needs       │
│ • Avoiding equity dilution          │
│                                     │
│ PROVIDERS:                          │
│ Clearco, Capchase, Pipe, Arc,       │
│ Lighter Capital, Uncapped           │
└─────────────────────────────────────┘

LINE OF CREDIT:
┌─────────────────────────────────────┐
│ OVERVIEW:                           │
│ Revolving credit facility for       │
│ working capital needs               │
│                                     │
│ TYPICAL TERMS:                      │
│ Amount: Based on AR or % of revenue │
│ Term: Annual renewal                │
│ Interest rate: Prime + 1-4%         │
│ Commitment fee: 0.25-0.5%           │
│ Draw/repay: As needed               │
│                                     │
│ REQUIREMENTS:                       │
│ ☐ Operating history (12+ months)    │
│ ☐ Revenue traction                  │
│ ☐ Cash in bank (often same bank)    │
│ ☐ Personal guarantee may be required│
│                                     │
│ BEST FOR:                           │
│ • Working capital fluctuations      │
│ • Bridge between payments           │
│ • Short-term cash needs             │
│                                     │
│ PROVIDERS:                          │
│ SVB, Mercury, First Republic,       │
│ Brex, Regional banks                │
└─────────────────────────────────────┘

EQUIPMENT FINANCING:
┌─────────────────────────────────────┐
│ OVERVIEW:                           │
│ Financing secured by equipment      │
│                                     │
│ TYPICAL TERMS:                      │
│ Amount: 80-100% of equipment cost   │
│ Term: Asset useful life (2-5 years) │
│ Interest rate: 5-15%                │
│ Structure: Lease or loan            │
│                                     │
│ REQUIREMENTS:                       │
│ ☐ Identifiable equipment            │
│ ☐ Equipment retains value           │
│ ☐ Credit approval                   │
│                                     │
│ BEST FOR:                           │
│ • Hardware purchases                │
│ • Computer equipment                │
│ • Office furniture/buildout         │
│                                     │
│ PROVIDERS:                          │
│ Equipment lessors, banks,           │
│ Dell/HP financing, Balboa Capital   │
└─────────────────────────────────────┘

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SECTION 2: DEBT EVALUATION FRAMEWORK
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DEBT NEED ASSESSMENT:
What is the primary use of funds?
☐ Extend runway between equity rounds
☐ Fund specific growth initiative
☐ Working capital / bridge
☐ M&A financing
☐ Equipment purchase
☐ Other: _______________

Amount needed: $_____________
Timeline: _______________
Use of funds: _______________

COMPANY READINESS:
Current financial state:
Cash: $_____________
Monthly burn: $_____________
Current runway: _____ months
MRR/ARR: $_____________

Revenue characteristics:
☐ Recurring revenue (SaaS)
☐ Transactional revenue
☐ Growing (___ % MoM)
☐ Stable
☐ Declining

Recent equity:
Last round: $_____________ (date: _______)
Investors: _______________
Post-money valuation: $_____________

DEBT SUITABILITY CHECKLIST:
☐ Clear, measurable use of funds
☐ ROI on debt is calculable
☐ Company can service debt payments
☐ Runway will be 18+ months post-debt
☐ Business performing to plan
☐ Next equity round not imminent (<6mo)
☐ Existing investors supportive
☐ Management bandwidth to manage debt

Score: ___/8 checked
(6+ = Good candidate for debt)

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SECTION 3: COST COMPARISON
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DEBT VS. EQUITY ANALYSIS:

Debt Option:
Amount: $_____________
Term: _____ years
Interest rate: ___%
Warrants: ___% coverage
Total interest cost: $_____________
Warrant value: $_____________ (___% dilution)
TOTAL COST OF DEBT: $_____________ (___% effective)

Equity Alternative:
Amount needed: $_____________
Current valuation: $_____________
Equity dilution: ___%
Cost of equity (% given up): $____________

COMPARISON:
Debt cost: $_____________
Equity cost: $_____________ (at current valuation)
Break-even valuation for debt: $_____________

Conclusion:
☐ Debt is cheaper if valuation increases
☐ Equity is safer if uncertainty is high
☐ Combination may be optimal

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SECTION 4: TERM SHEET EVALUATION
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VENTURE DEBT TERM SHEET CHECKLIST:
| Term | Offered | Market | Acceptable? |
|------|---------|--------|-------------|
| Facility size | $_____ | 25-35% of round | ☐ Y ☐ N |
| Interest rate | ___% | 8-15% | ☐ Y ☐ N |
| Term | ___ years | 3-4 years | ☐ Y ☐ N |
| Draw period | ___ months | 6-18 months | ☐ Y ☐ N |
| I/O period | ___ months | 6-18 months | ☐ Y ☐ N |
| Warrant coverage | ___% | 0.5-2% | ☐ Y ☐ N |
| Fees | ___% | 0-1% | ☐ Y ☐ N |
| Prepayment penalty | ___% | 0-3% | ☐ Y ☐ N |
| Financial covenants | | | ☐ Review |
| MAC clause | | | ☐ Review |

NEGOTIATION PRIORITIES:
1. Lower warrant coverage
2. Longer interest-only period
3. Flexible draw period
4. Reasonable covenants
5. Limited prepayment penalty

RED FLAGS:
☐ Excessive warrant coverage (>3%)
☐ Full recourse to founders
☐ Tight financial covenants
☐ Broad MAC clause
☐ Excessive fees
☐ Control provisions (board seat, etc.)

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SECTION 5: COVENANT MANAGEMENT
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COMMON COVENANTS:
| Type | Typical Requirement | Impact |
|------|---------------------|--------|
| Minimum cash | $_____ in bank | High |
| Revenue floor | $_____ minimum | Medium |
| Burn rate cap | <$_____ monthly | Medium |
| Reporting | Monthly financials | Low |
| Equity raise | Prepay on raise | Medium |
| Change of control | Prepay on exit | Medium |

YOUR COVENANTS:
| Covenant | Requirement | Current | Status |
|----------|-------------|---------|--------|
| Min cash | $_____ | $_____ | ☐ Pass ☐ Watch ☐ Breach |
| Revenue | $_____ | $_____ | ☐ Pass ☐ Watch ☐ Breach |
| Burn rate | <$_____ | $_____ | ☐ Pass ☐ Watch ☐ Breach |
| Other | _____ | _____ | ☐ Pass ☐ Watch ☐ Breach |

COVENANT MONITORING CALENDAR:
| Month | Cash | Revenue | Burn | Report Due | Status |
|-------|------|---------|------|------------|--------|
| Jan | $ | $ | $ | ___ | ☐ |
| Feb | $ | $ | $ | ___ | ☐ |
| Mar | $ | $ | $ | ___ | ☐ |
| ... | | | | | |

BREACH RESPONSE PLAN:
If covenant breach is likely:
1. Notify lender early (don't surprise)
2. Propose amendment/waiver
3. Show path back to compliance
4. Offer additional security/covenants if needed

Debt Decision Summary

Factor	Assessment	Notes
Use of funds	☐ Clear ☐ Unclear
ROI calculable	☐ Yes ☐ No
Can service debt	☐ Yes ☐ Marginal ☐ No
Runway impact	☐ Extends ☐ Neutral ☐ Risk
Covenant risk	☐ Low ☐ Medium ☐ High
Equity alternative	☐ Available ☐ Preferred ☐ Not

Final Decision

☐ Proceed with debt financing (Type: _______) ☐ Pursue equity round instead ☐ Combine debt + equity ☐ Not appropriate at this time

Rationale: _______________________________________________

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