20 LEXPERT MAGAZINE
|
MAY 2019
COLUMNS TECHNOLOGY
(in addition to the usual loan arrangement
discussed above) also requires that they be
issued a warrant by the debtor company.
Under the warrant, the company agrees to
issue to the lender at a date in the future eq-
uity shares at a certain price, typically the
fair market value of the shares at the time
the warrant is granted. en, presumably
the value of the company (and the value
of the shares underlying the warrant) will
increase, such that on the ultimate sale of
the company, the lender might have to pay
the company $ 1.00 per share for the shares
underlying the option (because when the
warrant was granted each share of the com-
pany was worth $ 1.00), but then the lender
will immediately turn around and sell each
share for $ 5.00 to the buyer of the com-
pany. e incremental growth in value of $
4.00 per share is pocketed by the lender and
represents dilution to the founder and early
investors (similar to the situation with the
investment in preference shares by the ven-
ture capital firm, though usually the war-
rant is for a smaller percentage of the shares
– but nevertheless, if the lender is insisting
on being granted warrants, this equity di-
lution factor has to be taken into account
as you cross compare term sheets from the
different sources of venture funding).
Be Careful With All Financing
ere are a few other risks of some venture
debt deals you should be aware of. Some
lenders, for example, will require, or at least
ask for, a personal guarantee from you (so,
that if your company falls on hard times,
and cannot repay the interest and princi-
pal of the loan, the lender can collect these
amounts from you, in which case your
other personal assets may be at risk, such as
equity you have in your house, or a cottage
property, etc.). As a general rule, you`ll will
want to avoid a deal where you have to pro-
vide a personal guarantee, if at all possible.
In a similar fashion, lenders will typi-
cally take security over the legal intellec-
tual property in the assets of your company
(such as the soware used to power your
solution), so that if you fail to pay amounts
due under the loan, the lender can seize
your assets and cause them to be sold to sat-
isfy the outstanding debt (and you would
be paid any excess received from the sale).
In short, while venture debt has some
advantages to venture capital, it also has
some elements that require close scrutiny
and management. Nevertheless, you really
should consider both, so that you can un-
derstand what it would take to minimize
equity dilution while still having addi-
tional working capital to fund the robust
growth of your fast growth company.
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