What Is Venture Debt? Trying to Understand How It Actually Works

stellpenso

I keep coming across the term venture debt in startup funding discussions and wanted to actually understand what is venture debt before assuming it works like a normal business loan. Here is what I have pieced together so far, would appreciate anyone correcting me or adding context.

Venture debt is basically a loan given to startups that have already raised some equity funding, usually from venture capital firms or specialized lenders who focus on startups rather than traditional banks. It is not meant to replace equity funding, it is usually used alongside it, often right after an equity round to extend runway without giving up more ownership. Lenders often require the company to already be backed by a recognized VC.

It usually comes with warrants attached, meaning the lender gets the right to buy a small amount of equity later, on top of the interest charged on the loan itself. It is generally seen as more expensive than a normal bank loan because of the risk involved, but far less dilutive than raising another equity round.

What I am still trying to understand is how founders decide the right time to take on venture debt versus just raising a bridge round instead.

Has anyone here actually used venture debt, either as a founder or someone advising startups? Curious how the terms compared to what you expected going in, and whether it turned out to be a good decision in hindsight.

Found a fairly clear explanation of this on Entrepreneur Plus while I was reading around the topic, helped me understand the founder side of it a bit better.