{"id":28852,"date":"2024-04-17T09:43:21","date_gmt":"2024-04-17T14:43:21","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=28852"},"modified":"2026-02-25T21:23:58","modified_gmt":"2026-02-26T02:23:58","slug":"venture-debt","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/venture-debt\/","title":{"rendered":"Venture Debt: Full Explanation, Sample Excel File, and Returns Calculations"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Venture Debt: Full Explanation, Sample Excel File, and Returns Calculations<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/venture-debt\/#How_Do_Lenders_Earn_Returns_with_Venture_Debt\">How Do Lenders Earn Returns with Venture Debt?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/venture-debt\/#How_Venture_Debt_Affects_the_Capitalization_Table\">How Venture Debt Affects the Capitalization Table<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/venture-debt\/#How_to_Calculate_the_Returns_on_Venture_Debt_Simple_Example\">How to Calculate the Returns on Venture Debt: Simple Example<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/venture-debt\/#More_Advanced_Treatment_of_Venture_Debt_in_the_Flow_of_Funds_and_Cap_Table_Analysis\">More Advanced Treatment of Venture Debt in the Flow of Funds and Cap Table Analysis<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Venture Debt Definition:<\/strong> Venture Debt is a \u201cbridge loan\u201d instrument used to fund startups *in between* normal, priced equity investments from venture capitalists; it results in a higher cash expense for the startups but reduced dilution in the short term, until the next funding round or exit.<\/p><\/blockquote>\n<p>Venture debt is relatively<strong> new<\/strong> compared with traditional forms of startup financing, such as equity investments from VC firms and even <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/convertible-notes\/\" target=\"_blank\" rel=\"noopener\">convertible notes<\/a>.<\/p>\n<p>It is <strong>most useful<\/strong> when a startup needs extra funding to make it to its next official VC round but doesn\u2019t want to go through an extended fundraising process or incur significant dilution immediately.<\/p>\n<p>For example, if the co-founders currently own 50% of the startup, maybe they need funding for the next 1 \u2013 2 years, and they don\u2019t want to drop to 35 \u2013 40% ownership.<\/p>\n<p><strong>Venture debt<\/strong> allows them to raise enough funds for 1 \u2013 2 years, pay cash interest over those years, and keep dilution to a manageable level, such as 0.5% or less.<\/p>\n<p>Venture debt always comes <strong>after<\/strong> a traditional VC round and <strong>before<\/strong> the next VC round; lenders would never fund startups without institutional VC investment first.<\/p>\n<p>Like convertible notes, venture debt (VD) has a maturity date and an attached interest rate (usually \u201cfloating\u201d and linked to a benchmark rate).<\/p>\n<p>However, <em>unlike<\/em> convertibles or <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/safe-notes\/\" target=\"_blank\" rel=\"noopener\">SAFE Notes<\/a>:<\/p>\n<ul>\n<li>VD is <strong>repaid<\/strong> in the next funding round (not converted into common shares);<\/li>\n<li>It may have an <strong>interest-only (IO) period<\/strong> with no principal payments, reducing the cash outflows;<\/li>\n<li>There are usually additional utilization or prepayment <strong>fees;<\/strong><\/li>\n<li>And it usually includes <strong>warrants<\/strong> that give lenders some of the equity upside in an exit.<\/li>\n<\/ul>\n<p>The <strong>potential returns<\/strong> on venture debt are higher than on standard corporate bonds because of the higher interest rates and warrants.<\/p>\n<p>However, the <strong>default risk<\/strong> is also much higher because many startups fail or fail to raise another VC funding round, so the higher potential returns compensate for that risk.<\/p>\n<p>In some ways, venture debt is more like <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/convertible-preferred-stock\/\" target=\"_blank\" rel=\"noopener\">convertible preferred stock<\/a> in terms of the risk and potential return profile &#8211; though the mechanics are quite different.<\/p>\n<p>Here\u2019s a sample Excel file and a written version of the video tutorial above:<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Startups-VC\/Venture-Debt\/Venture-Debt-Cap-Table.xlsx\" target=\"_blank\" rel=\"noopener\">Cap Table with Venture Debt Included (XL)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Startups-VC\/Venture-Debt\/Venture-Debt-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Venture Debt Tutorial \u2013 Presentation Slides (PDF)<\/a><\/p>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>1:20:<\/strong> Part 1: Venture Debt: The Short Version<\/li>\n<li><strong>3:35:<\/strong> Part 2: How Lenders Earn Returns with Venture Debt<\/li>\n<li><strong>5:35:<\/strong> Part 3: Venture Debt and the Cap Table<\/li>\n<li><strong>6:43:<\/strong> Part 4: Excel Example of Venture Debt Returns<\/li>\n<li><strong>13:40:<\/strong> Part 5: More Advanced Nuances in Cap Tables<\/li>\n<li><strong>14:20:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How_Do_Lenders_Earn_Returns_with_Venture_Debt\"><\/span><strong>How Do Lenders Earn Returns with Venture Debt?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>With venture debt, <strong>returns<\/strong> come from 3 main sources:<\/p>\n<p><strong>1) Interest<\/strong> \u2013 The interest rates tend to be higher than on traditional bank loans because startups are much riskier. Interest is almost always paid in cash (and if not, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/pik-interest\/\" target=\"_blank\" rel=\"noopener\">PIK Interest<\/a> is equivalent from a returns perspective).<\/p>\n<p>The interest-only period also helps because it allows lenders to earn interest on a higher principal amount in the early years.<\/p>\n<p><strong>2) Fees<\/strong> \u2013 As with standard debt, there are usually loan draw or utilization fees and a prepayment penalty fee if the VD is repaid before the official maturity date.<\/p>\n<p>These fees might be between 0.5% and 2.0% of the principal, so they boost the returns modestly.<\/p>\n<p><strong>3) Warrants<\/strong> \u2013 Venture debt lenders also get warrants, similar to options, allowing them to capture some of the upside if the company is sold.<\/p>\n<p>These warrants typically represent <strong>well below 1%<\/strong> of the fully diluted share count (e.g., 0.1% or 0.2%), and the exercise price is based on the share price in one of the surrounding VC rounds.<\/p>\n<p>Lenders always want the share price from the previous round, so they pay less to exercise the warrants if there\u2019s an exit.<\/p>\n<p>Here\u2019s an example of the venture debt terms used in this model:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28854 size-full\" title=\"Venture Debt Terms\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093900\/01-Venture-Debt-Terms.jpg\" alt=\"Venture Debt Terms\" width=\"1012\" height=\"490\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093900\/01-Venture-Debt-Terms.jpg 1012w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093900\/01-Venture-Debt-Terms-300x145.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093900\/01-Venture-Debt-Terms-768x372.jpg 768w\" sizes=\"(max-width: 1012px) 100vw, 1012px\" \/><\/p>\n<p>When calculating the <strong>returns<\/strong> to venture lenders, you must include all these factors.<\/p>\n<p>The initial loan issuance represents the <strong>upfront investment<\/strong> and is shown with a negative, while the interest, principal repayments, maturity\/exit repayment, prepayment penalty fees, loan utilization fees, and warrants all represent <strong>cash inflows<\/strong>.<\/p>\n<p>The trickiest part of this process is getting the warrant math correct because the warrants are often cashed out years into the future and require an extended timeline to forecast.<\/p>\n<p>You can see a simple returns calculations below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28855 size-full\" title=\"Venture Debt Returns\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093924\/02-Venture-Debt-Returns.jpg\" alt=\"Venture Debt Returns\" width=\"1796\" height=\"724\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093924\/02-Venture-Debt-Returns.jpg 1796w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093924\/02-Venture-Debt-Returns-300x121.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093924\/02-Venture-Debt-Returns-1024x413.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093924\/02-Venture-Debt-Returns-768x310.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093924\/02-Venture-Debt-Returns-1536x619.jpg 1536w\" sizes=\"(max-width: 1796px) 100vw, 1796px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Venture_Debt_Affects_the_Capitalization_Table\"><\/span><strong>How Venture Debt Affects the Capitalization Table<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Aside from the small number of warrants granted, there is almost no <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/capitalization-table\/\" target=\"_blank\" rel=\"noopener\">cap table impact<\/a> from venture debt.<\/p>\n<p>However, since these warrants are only ~0.1% of the fully diluted shares, they create negligible dilution next to traditional VC rounds.<\/p>\n<p>Even when the venture debt is repaid, that doesn\u2019t affect the cap table \u2013 it simply reduces the company\u2019s Cash balance and may affect the eventual exit calculations.<\/p>\n<p>You can see an example of the cap table impact immediately after a venture debt round below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28856 size-full\" title=\"Venture Debt Impact on the Cap Table After Issuance\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093943\/03-Venture-Debt-Cap-Table.jpg\" alt=\"Venture Debt Impact on the Cap Table After Issuance\" width=\"1389\" height=\"418\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093943\/03-Venture-Debt-Cap-Table.jpg 1389w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093943\/03-Venture-Debt-Cap-Table-300x90.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093943\/03-Venture-Debt-Cap-Table-1024x308.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17093943\/03-Venture-Debt-Cap-Table-768x231.jpg 768w\" sizes=\"(max-width: 1389px) 100vw, 1389px\" \/><\/p>\n<div class='code-block code-block-9' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22172829\/vc-tile.png\" alt=\"Venture Capital & Growth Equity Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Model and Value Startups, Understand Cap Tables, and Prepare for VC Interviews<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Evaluate companies and deals like a pro<\/h4>\n              <p>You\u2019ll understand cap tables, startup\/growth valuations, and exits<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Master financial modeling<\/h4>\n            <p>You\u2019ll build forecasts and analyze metrics for tech and biotech startups<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 9 case studies<\/h4>\n            <p>You\u2019ll learn the numbers and how to make investment recommendations\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/venture-capital-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Venture-Capital-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"How_to_Calculate_the_Returns_on_Venture_Debt_Simple_Example\"><\/span><strong>How to Calculate the Returns on Venture Debt: Simple Example<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To calculate the returns here, we\u2019ll make a few simple assumptions about the venture debt used to fund this startup, which is raised between its Series A and B rounds.<\/p>\n<p>After the Series B round, we\u2019ll assume an exit via a sale to another company.<\/p>\n<p>Here\u2019s a description of each round and the exit:<\/p>\n<ul>\n<li><strong>Series A Round:<\/strong> $5 million investment at a $15 million pre-money valuation; done in Year 1 with a 10% employee options pool and a 1x <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/liquidation-preference\/\" target=\"_blank\" rel=\"noopener\">liquidation preference<\/a>.<\/li>\n<li><strong>Venture Debt Round:<\/strong> $2.5 million investment in Year 2 with a 1-year interest-only period, 3 years of amortization, an interest rate of SOFR + 7.0%, a 2.0% prepayment penalty fee, a 0.5% loan draw fee, and 0.1% warrant coverage with exercise price based on the Series A share price.<\/li>\n<\/ul>\n<p>SOFR is the \u201cSecured Overnight Financing Rate,\u201d a common benchmark interest rate similar to the 10-year U.S. Treasury yield.<\/p>\n<ul>\n<li><strong>Series B Round:<\/strong> $15 million investment at a $50 million pre-money valuation; done in Year 5 with an upsized 20% employee options pool and a 1x liquidation preference. The proceeds repay the remaining venture debt.<\/li>\n<li><strong>Exit:<\/strong> $200 million Exit Equity Value in Year 8.<\/li>\n<\/ul>\n<p>We\u2019d start this exercise by setting up the full cap table, including the exit calculations, to establish each party\u2019s ownership at the end.<\/p>\n<p>For more on this one, please see our <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/capitalization-table\/\" target=\"_blank\" rel=\"noopener\">capitalization table tutorial<\/a>.<\/p>\n<p>When the exit takes place, the option and warrant holders <strong>pay to exercise<\/strong> their options or warrants, which increases the available proceeds:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-28857\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094037\/04-Venture-Debt-Exit-Options-Warrants.jpg\" alt=\"Venture Debt in an Exit - Options and Warrants\" width=\"1772\" height=\"881\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094037\/04-Venture-Debt-Exit-Options-Warrants.jpg 1772w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094037\/04-Venture-Debt-Exit-Options-Warrants-300x149.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094037\/04-Venture-Debt-Exit-Options-Warrants-1024x509.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094037\/04-Venture-Debt-Exit-Options-Warrants-768x382.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094037\/04-Venture-Debt-Exit-Options-Warrants-1536x764.jpg 1536w\" sizes=\"(max-width: 1772px) 100vw, 1772px\" \/><\/p>\n<p>The Series A and B investors get paid first, and the remaining proceeds are split up between the employee option holders, the venture debt investors, and the co-founders:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-28858\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094100\/05-Venture-Debt-Exit-Ownership-Split.jpg\" alt=\"Venture Debt in an Exit - Ownership Split\" width=\"1558\" height=\"698\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094100\/05-Venture-Debt-Exit-Ownership-Split.jpg 1558w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094100\/05-Venture-Debt-Exit-Ownership-Split-300x134.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094100\/05-Venture-Debt-Exit-Ownership-Split-1024x459.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094100\/05-Venture-Debt-Exit-Ownership-Split-768x344.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094100\/05-Venture-Debt-Exit-Ownership-Split-1536x688.jpg 1536w\" sizes=\"(max-width: 1558px) 100vw, 1558px\" \/><\/p>\n<p>With the venture debt, the first step is to <strong>track the issuances and repayments<\/strong> in a simple schedule, factoring in the issuance date, the interest-only period, and the repayment in the Series B round.<\/p>\n<p>Most of these are simple \u201cdate check\u201d formulas:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28859 size-full\" title=\"Venture Debt Formulas in a Schedule\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094118\/06-Venture-Debt-Formulas.jpg\" alt=\"Venture Debt Formulas in a Schedule\" width=\"1348\" height=\"648\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094118\/06-Venture-Debt-Formulas.jpg 1348w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094118\/06-Venture-Debt-Formulas-300x144.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094118\/06-Venture-Debt-Formulas-1024x492.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094118\/06-Venture-Debt-Formulas-768x369.jpg 768w\" sizes=\"(max-width: 1348px) 100vw, 1348px\" \/><\/p>\n<p>The <strong>principal repayment<\/strong> one is slightly more complex because the principal is repaid <em>after<\/em> the interest-only period but <em>on or before the maturity<\/em>, and we never want to repay more than the remaining principal in the year:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28860 size-full\" title=\"Venture Debt - Principal Repayment Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094149\/07-Venture-Debt-Principal-Repayments.jpg\" alt=\"Venture Debt - Principal Repayment Formula\" width=\"1352\" height=\"735\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094149\/07-Venture-Debt-Principal-Repayments.jpg 1352w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094149\/07-Venture-Debt-Principal-Repayments-300x163.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094149\/07-Venture-Debt-Principal-Repayments-1024x557.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094149\/07-Venture-Debt-Principal-Repayments-768x418.jpg 768w\" sizes=\"(max-width: 1352px) 100vw, 1352px\" \/><\/p>\n<p>Next, you can set up the <strong>net cash flows<\/strong> and show the venture debt issuance as the \u201cupfront investment,\u201d with the interest, fees, and principal repayments all as cash inflows:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28861 size-full\" title=\"Venture Debt - Full Returns Calculations and IRR\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094214\/08-Venture-Debt-Full-Returns.jpg\" alt=\"Venture Debt - Full Returns Calculations and IRR\" width=\"1788\" height=\"734\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094214\/08-Venture-Debt-Full-Returns.jpg 1788w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094214\/08-Venture-Debt-Full-Returns-300x123.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094214\/08-Venture-Debt-Full-Returns-1024x420.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094214\/08-Venture-Debt-Full-Returns-768x315.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/17094214\/08-Venture-Debt-Full-Returns-1536x631.jpg 1536w\" sizes=\"(max-width: 1788px) 100vw, 1788px\" \/><\/p>\n<p>The prepayment penalty fees and draw fees are simple date checks, and for the net warrant proceeds, if we\u2019re on the exit date, we retrieve the number from the exit analysis.<\/p>\n<p><strong>Remember to <em>subtract<\/em> the amount the venture lenders pay to exercise their warrants!<\/strong><\/p>\n<p>The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/cash-on-cash-return-vs-irr\/\" target=\"_blank\" rel=\"noopener\">internal rate of return (IRR) and multiple of invested capital (MOIC)<\/a> here are 12.4% and 1.4x, respectively, which matches our expectations.<\/p>\n<p>The average interest rate in the period is 10 \u2013 11%, and the fees and warrants boost the IRR slightly above that level.<\/p>\n<p>It would be exceptionally unusual if they boosted the IRR to 20% or 30%.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"More_Advanced_Treatment_of_Venture_Debt_in_the_Flow_of_Funds_and_Cap_Table_Analysis\"><\/span><strong>More Advanced Treatment of Venture Debt in the Flow of Funds and Cap Table Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Of course, there are many more complexities to venture debt:<\/p>\n<ul>\n<li>You should <strong>determine the exercise of the warrants and options \u201cthe right way\u201d<\/strong> by calculating the implied share price in the exit and comparing it to the respective exercise prices. This creates <a href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/\" target=\"_blank\" rel=\"noopener\">circular references<\/a> and other Excel issues.<\/li>\n<li>You should <strong>analyze different scenarios<\/strong>, such as when one investor group converts their preferred shares into common shares and others do not (as in a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/flow-of-funds\/\" target=\"blank\">Flow of Funds<\/a>).<\/li>\n<li>You should also factor in <strong>participating preferred and participation caps<\/strong> for the VC investors, which will affect the equity proceeds.<\/li>\n<li>You should account for options that are <strong>vested and exercisable<\/strong> ones that are not, as this difference can significantly affect the proceeds to each group.<\/li>\n<\/ul>\n<p>We cover these more advanced nuances (and more) in our full <a href=\"https:\/\/breakingintowallstreet.com\/venture-capital-modeling\/\" target=\"_blank\" rel=\"noopener\">Venture Capital &amp; Growth Equity Modeling course<\/a> in the Advanced Cap Table case study there.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Venture Debt is a \u201cbridge loan\u201d instrument used to fund startups *in between* normal, priced equity investments from venture capitalists; it results in a higher cash expense for the startups but reduced dilution in the short term, until the next funding round or exit.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-28852","biws_kb","type-biws_kb","status-publish","hentry","kb_category-venture-capital"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/28852","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=28852"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}