Venture debt is non-dilutive (mostly) financing for VC-backed companies — a loan that trades equity sacrifice for repayment obligations and lender oversight.

How it works

Specialty lenders — Silicon Valley Bank historically, plus groups like Hercules, Trinity, and others — underwrite venture debt against:

• Recent equity raise quality and amount (often ~25–50% of last round)
• Cash runway and revenue trajectory
• Investor support for future rounds

Typical structure: three-year term, interest-only period, then amortization. Warrants cover 5–20% of the loan amount at a strike near the last round price. Some deals tie to milestones — ARR thresholds, next equity close.

Uses include extending runway between rounds, financing capex, or funding working capital for inventory-heavy models. It is not a substitute for broken unit economics — lenders expect equity sponsors to recapitalize if the company misses plan.

Covenants may require minimum cash, revenue levels, or prohibit additional debt. Default triggers can accelerate repayment and spook equity investors.

Why it matters

• Founders: Cheaper than equity if you hit plan — but debt sits senior in a wind-down. Model downside scenarios before signing.
• Investors: Debt can reduce dilution in follow-ons or signal confidence from lenders who underwrote the syndicate. Over-levered cap tables hurt everyone in down rounds.

Common mistake

Raising venture debt to avoid a down round without a credible path to the next equity close. Lenders and VCs both treat that as delay, not solution.

Related ideas

See also warrants, bridge round, and working capital.