Make-whole is a contractual prepayment premium requiring the borrower to pay the lender additional amounts—typically the present value of foregone interest—if debt is retired before its scheduled maturity.

How it works

Standard term loans pay interest over time. If a company repays early—because of a big equity round, acquisition, or refinancing—the lender loses future coupon income. A make-whole clause compensates that loss.

The formula varies by contract. A common approach discounts remaining interest payments to present value using a benchmark rate, sometimes with a floor (e.g., minimum one year of interest). Example: three years left on a loan at 10% with a make-whole might add hundreds of basis points of cost versus paying only outstanding principal.

Make-whole differs from simple prepayment fees (flat percentage) and from call protection periods that block early repayment entirely for an initial window.

Why it matters

• Founders: Before signing venture debt, model exit and refinance scenarios with make-whole included. A successful acquisition can still leave less cash than expected.
• Investors: Enterprise value in an M&A process is not all equity proceeds—debt payoff plus make-whole sits ahead of common in the waterfall.

Common mistake

Assuming paying off debt at par is always cheap when rates have fallen. Make-whole formulas can still penalize early exit because they protect the lender’s original yield, not current market rates.

Related ideas

See also venture debt, call protection, bullet maturity, and cash sweep.