The main advan­tage of venture debt is that it gives young growth compa­nies access to debt capi­tal during the growth phase. They receive this debt capi­tal at a stage when they gene­rally do not yet have access to tradi­tio­nal bank finan­cing due to the lack of tangi­ble assets as colla­te­ral and the lack of sustainable profits from opera­ting acti­vi­ties. In contrast to raising capi­tal as part of an equity finan­cing round, with venture debt there is no dilu­tion of share­hol­ders and holders of equity incen­ti­ves (ESOP, VSOP) as a result of raising finan­cing, with the excep­tion of warrants. — In contrast to an equity finan­cing round, there is also no need to deter­mine a valua­tion of the company to be finan­ced when taking out a venture loan. The tran­sac­tion dura­tion of a venture debt tran­sac­tion is gene­rally shorter than that of an equity finan­cing round. A typi­cal venture debt project can be comple­ted in around 6 to 8 weeks.

Venture loans are gene­rally not a stand-alone finan­cing solu­tion, but a finan­cing instru­ment that is used to comple­ment equity finan­cing rounds. Venture loans are often taken out between two finan­cing rounds in order to finance the company’s further deve­lo­p­ment until the next valua­tion-rele­vant mile­stone is reached. Another exam­ple of the use of venture debt is the bridge finan­cing of later-stage start-ups until a plan­ned IPO or exit, without diluting exis­ting inves­tors along the way.

Venture loans are senior, high-inte­rest and colla­te­ra­li­zed loans that are usually gran­ted on the basis of a writ­ten loan agree­ment ( term loans) and are colla­te­ra­li­zed with the company’s assets. Venture loans gene­rally have terms of between 36 and 48 months. In addi­tion tobullet loans, where the company only pays inte­rest during the term and the full loan amount is only due for repay­ment at the end of the term, venture loans withamor­tiz­ing loans tend to domi­nate the market. With these, after an initial repay­ment-free phase (usually 12 and 24 months) in which only inte­rest has to be paid(inte­rest-only period), the company pays the venture lender regu­lar (usually monthly) annui­ties consis­ting of inte­rest and repay­ment. Venture loans in the form of abond are less common.

The higher risk assu­med by the venture debt provi­der corre­sponds to the control and infor­ma­tion rights custo­mary in the indus­try in the venture loan docu­men­ta­tion, usually in the loan agree­ment. In prac­tice, the so-called nega­tive covenants are important here, i.e. contrac­tual clau­ses that prohi­bit the borrower from imple­men­ting certain legal measu­res or taking them without the consent of the venture debt provider.

Typi­cal examp­les of such nega­tive covenants are the prohi­bi­tion of distri­bu­ti­ons to share­hol­ders during the term of the loan, the prohi­bi­tion of the sale of signi­fi­cant assets or signi­fi­cant share­hol­dings or the prohi­bi­tion or rest­ric­tion of taking out further debt finan­cing or further colla­te­ral during the term of the loan. Non-compli­ance with these covenants by the borrower leads to a breach of contract, which entit­les the venture debt provi­der to termi­nate and acce­le­rate the venture loan if the company does not remedy these breaches.

When draf­ting the contrac­tual docu­men­ta­tion for German deals, care must also be taken to ensure that venture loans are suffi­ci­ently clearly distin­gu­is­hed from the legal insti­tu­tion of the share­hol­der loan and, in parti­cu­lar, from so-called equi­va­lent third-party loans. — The venture debt provi­der is not a “share­hol­der-equi­va­lent third party”, but an exter­nal finan­cing partner.

You can read the detailed article by Dr. Stefan Gott­ge­treu and Andrea Schlote (both Bird & Bird) on “Venture debt in the German market — diffe­ren­tia­tion from the legal insti­tu­tion of share­hol­der loans and equi­va­lent third-party loans” in the new issue of FYB-2024 or order it as a PDF!

See www.fyb.de/shop.

Dr. Stefan Gottgetreu

is a lawyer and part­ner at Bird & Bird with over 20 years of expe­ri­ence in the venture capi­tal sector as well as in mergers and acqui­si­ti­ons and gene­ral corpo­rate tran­sac­tions. His focus is on early stage/start-up advi­sory and venture capi­tal tran­sac­tions (both equity finan­cing rounds and venture debt), where he has advi­sed on more than 80 successful deals in tech­no­logy-inten­sive indus­tries over the last ten years.