A security interest is the lender’s right to take specified collateral if a borrower fails to meet debt obligations.

How it works

Loan documents identify collateral — often all assets, accounts receivable, or intellectual property. The lender files financing statements (UCC-1 in the U.S.) to notify other parties of its claim. Perfection of the interest determines priority among competing secured creditors.

Venture debt commonly takes a blanket lien on assets, sometimes subordinate to a senior bank line. In default or acquisition, secured lenders must be satisfied or release liens before clean exits close.

Intercreditor agreements rank multiple liens — first lien vs second lien. Equity holders sit below secured debt in downside scenarios.

Why it matters

• Founders: Encumbered IP or receivables can block asset sales or clean Series B terms. Negotiate release provisions on paydown or exit.
• Investors: Cap table modeling must include debt stacks. A high secured debt load shrinks proceeds to preferred and common in moderate outcomes.

Common mistake

Signing venture debt without tracking which assets are pledged and whether future rounds require lender consent for additional liens.

Related ideas

• Senior debt
• Second lien
• Venture debt covenants and events of default