If you are going to raise institutional venture capital to build and grow your business, it’s worthwhile to consider using venture debt to complement the equity you raise. Venture debt is a type of loan offered by banks and nonbank lenders that is designed specifically for early-stage, high-growth companies with venture capital backing. The vast majority of venture-backed companies raise venture debt at some point in their lives from specialized banks such as Silicon Valley Bank.

The first rule of venture debt

The first rule of venture debt is that it follows equity; it doesn’t replace it. Venture lenders use venture capital support as a source of validation and the primary yardstick for underwriting a loan. Raising debt for an early-stage company is more efficient when you can precisely describe the performance objectives associated with the last round of equity, the intended timing and strategy for raising the next round, and how the loan you are asking for will support or supplement those plans.

Venture debt availability and terms are always contextual. Loan types and sizes vary significantly based on the scale of your business, the quality and quantity of equity raised to date, and the objective for which the debt is being raised. The amount of venture debt available is calibrated to the amount of equity the company has raised, with loan sizes varying between 25% and 50% of the amount raised in the most recent equity round. Early-stage loans to pre-revenue or product validation companies are much smaller than loans available to later-stage companies in expansion mode. And companies without VC investors face significant difficulties in attracting any venture debt.

The role of debt vs. equity

It’s critical to understand the fundamental differences between debt and equity. For equity, repayment is usually not contractually required. While some form of liquidity event is presumed within a time frame of less than a decade, and redemption rights can sneak into your financing if you aren’t vigilant, equity is long-term capital. The use of equity is supremely flexible—it can fund almost any legitimate business purpose. However, it is difficult to reprice or restructure equity if execution doesn’t exactly match the business plan.

In comparison, debt can provide short-term or long-term capital. The structure, pricing, and duration are closely tied to the purpose of the capital. Debt can be configured to include financial covenants, defined repayment terms, and other features to mitigate credit and other risks borne by the lender. These characteristics limit the utility of debt, from the borrower’s perspective, to a predefined set of business objectives, but they allow the lender to structure and price the loan to align with the borrower’s current circumstances.

The entrepreneur’s perspective

If price were …