VC & PE Glossary
What Is First Lien?
Updated
Definition
First lien is the senior secured claim on a borrower's assets—repaid before subordinated debt and equity in default or sale—common in venture debt and buyout financing.
Useful for: Founders, Investors
First lien debt holds the highest-priority security interest in a borrower’s collateral—cash, receivables, intellectual property, equipment—so holders are paid first in enforcement, bankruptcy, or asset sale ahead of second lien and unsecured creditors.
How it works
Venture debt lenders typically take a first lien on substantially all assets while warrants provide equity upside. Credit agreements define collateral, reporting covenants, and event of default remedies including seizure and sale. In recovery, first lien lenders exhaust collateral value before junior claimants receive proceeds—equity often receives nothing in deep distress.
Buyout financing stacks first lien term loans and revolvers with second lien or mezzanine below. Subordination agreements clarify payment order. Founders personally guarantee only in rare early-stage cases; most venture debt is non-recourse to founders beyond fraud.
Adding new debt requires intercreditor agreements if multiple liens coexist—second lien lenders accept subordination for higher yield.
Why it matters
- Founders: First lien enables growth capital without immediate dilution but constrains future borrowing and M&A flexibility; default risks loss of control via lender action.
- Investors: Equity sits below first lien—heavy debt loads reduce equity upside in moderate exits and amplify wipeout risk in down scenarios.
Common mistake
Treating venture debt as “free money” because covenants feel loose at signing. First lien bites when revenue misses and lenders block additional financing or force cash sweep prepayments.
Related ideas
See venture debt, event of default, cash sweep, and second lien.
Related terms
- Cash Sweep — A cash sweep is a covenant requiring a borrower to use excess cash — above a agreed minimum balance or cap — to prepay debt automatically, reducing principal before scheduled maturity.
- Event of Default — An event of default is a contract breach—missed payment, covenant violation, or other trigger—that gives lenders rights to accelerate debt, seize collateral, or force remedies.
- Venture Debt — Venture debt is a loan or credit facility for venture-backed companies — typically repaid over three to four years, often with warrants — used to extend runway or fund assets without immediate equity dilution.
Common questions
Short answers for founders, LPs, and operators