Legal & Compliance
Venture Debt Covenant
Financial or operational conditions that a startup must maintain to remain in compliance with its venture debt agreement.
Venture debt covenants are contractual requirements in a venture lending agreement that the borrowing company must continuously satisfy. Common covenants include maintaining minimum cash balances, hitting revenue targets, achieving certain metrics by specified dates, or maintaining existing VC investor support. Breaching a covenant can trigger default provisions, accelerated repayment, or additional fees.
In Practice
The venture debt facility required a minimum cash balance of $5M and quarterly revenue growth of at least 10%. When revenue grew only 6% in Q3, the startup was in technical default and had to negotiate a covenant waiver.
Why It Matters
Covenants are the hidden risk in venture debt. While the cost of capital may seem attractive, covenant breaches can create existential crises at exactly the wrong time — when the company is already struggling.
VC Beast Take
Read the covenants before you sign the term sheet. Venture debt is cheap capital until you trip a covenant, then it becomes the most expensive capital you've ever raised.
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