How to structure a venture debt agreement without compromising growth

Venture debt is a form of non-dilutive financing designed for venture-backed startups. It is typically used alongside equity financing rounds rather than as a replacement for them.

The primary advantage is straightforward: startups gain access to additional capital without giving up significant ownership stakes. 

Venture debt is generally most effective during the growth and scaling stages of a company, particularly after a Series A or Series B round when the business has already demonstrated traction and secured support from institutional investors.

It also requires at least 12–18 months of runway (the period during which a project can operate without an injection of capital) to avoid acting hastily and jeopardizing the project. 

It is equally important to have consistent financial growth KPIs to avoid compromising the company’s ownership structure (cap table) and to be able to comply with financial covenants.

When used in the right circumstances, venture debt can dramatically reduce founder dilution. According to industry benchmarks often cited  by lenders, venture debt can result in up to 95% less dilution than raising the equivalent capital through an equity round.

Structuring venture debt correctly is critical to ensuring it remains a growth tool rather than becoming a financial burden. 

There are four core components every founder should understand. 

Generally, the amount typically considered optimal for venture debt ranges from 25% to 35% of the most recent funding round, in order to ensure liquidity without over-leveraging the project. 

As for terms, they typically range from 36 to 48 months, with an initial grace period of up to 12 months, since the goal is to prioritize growth. 

Interest rates in Spain range from 8% to 12% per year, supplemented by warrants (rights to purchase shares at a fixed price, or strike price) representing 5% to 15% of the loan amount, which can reach 15% or even 20% in very early-stage or higher-risk phases.

Lenders often receive warrants as compensation for the additional risk associated with lending to high-growth startups. These warrants are usually exercised during liquidity events or future financing rounds, often within seven to ten years of issuance. 

The resulting dilution tends to remain relatively modest. Depending on the warrant structure and company valuation, effective dilution commonly falls between 0.5% and 2% of total equity, significantly lower than the 15%–25% dilution associated with a traditional equity round.

Financial covenants are among the most important aspects of any venture debt agreement. Founders should seek flexibility wherever possible. For example, covenant holidays can provide temporary relief during periods of weaker performance or unexpected market conditions. 

Before entering negotiations, founders should conduct a thorough internal review of their financial position. A realistic self-assessment helps identify areas that could become problematic during lender due diligence .

Lenders will require security interests over corporate assets such as accounts receivable, inventory, and may even seek rights over the platform’s intellectual property, including patents, trademarks, and source code. 

As a strategic measure, you can negotiate a negative pledge clause that prevents the intellectual property from being pledged to other lenders, helping preserve your flexibility to license technology. Keep in mind that intellectual property is often your most valuable asset. 

You should also consider that venture debt is typically senior secured, meaning it will be first in line for repayment if something goes wrong. Venture capital investors and founders come after the lender in the repayment hierarchy. 

It is equally important to remember that if covenants are breached or overly restrictive provisions are included in the agreement, venture debt can hinder future fundraising rounds. 

So, what is advisable? Do not take on additional debt without prior notice, do not sell the company without approval, and maintain prudent cash reserves. Remember that this is debt and must ultimately be repaid.

Choosing the right financing structure is essential, but it is equally important to avoid the mistakes that commonly undermine a company's ability to scale.  

We have compiled some of the most significant: 

• Excessive financial leverage. As a general benchmark, borrowing more than 40% of the capital raised can create excessive debt and put the company at risk, although the appropriate threshold will depend on the sector, burn rate, and revenue outlook. 
• Poor timing. For example, signing a venture debt agreement without sufficient runway, meaning when the startup has little time remaining before running out of cash. 
• Restrictive covenants. These are provisions that impose limits within a venture debt agreement, such as restricting investment in growth marketing or R&D, or requiring prior approval for expenditures in critical growth areas.
• Failing to align with existing venture capital shareholders before signing the facility. This can create distrust and friction by leaving current equity investors out of the decision-making process. 
• Underestimating the impact of warrants on future dilution. Although deferred, warrants can still have a meaningful impact on equity ownership and future funding rounds. 

If you would like to complement your financing strategy with venture capital to maximize growth potential, Bolboreta Innova's venture capital team can serve as a strategic partner. We provide liquidity, industry expertise, and hands-on support to help you scale without losing control of your business while maintaining sustainable growth. 

Tell us about your needs. We'd be delighted to help.