Understanding venture debt, a founder's guide to smart financing
Venture debt is the most misunderstood line item on an operator's cap table. Here's when it's the right tool, and when it's a trap.
January 6, 2025 · Maya Laurent
Founders often ask us how we think about debt vs. equity once a Series A closes. Most of the time the honest answer is “neither, yet”. But when a startup reaches steady revenue and predictable churn, venture debt becomes one of the most efficient ways to buy runway.
What venture debt actually is
Venture debt is a term loan or revolving facility extended to companies that are post-Series A and backed by tier-one VCs. Unlike traditional bank debt, it’s underwritten on the strength of your cap table rather than free cash flow.
When it makes sense
- Your monthly burn is predictable to within ±10%.
- You have at least 18 months of runway post-draw.
- The loan replaces equity you’d otherwise sell at a dilution cost higher than the interest rate.
When it doesn’t
- Your revenue line is still zigzagging above and below the trend.
- You’re using it to fund a pivot instead of to fund a proven motion.
- Covenants lock you into milestones you wouldn’t choose on your own.
The quiet rule
Debt buys you time, not direction. If you need more time to execute a plan your investors already believe in, debt is probably cheaper than equity. If you need more time to figure out what plan you’re on, debt will just make the wall come at you faster.