Debt financing options tcn 11 9-12

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Debt financing options tcn 11 9-12

  1. 1. Debt  Financing  Op.ons   Dan  Allred  &  Glen  Mello   Silicon  Valley  Bank  
  2. 2. Funding  sources:  the  lines  are  blurring   Tradi.onal   VC  Funds   Seed   Funds   Super   Angels   Angels  
  3. 3. Debt  vs.  Equity  Debt     Equity  •  Lower  risk:  first  money  to   •  Higher  risk:  lives  &  dies  with   be  paid  back   the  company  •  Rela.vely  inexpensive   •  Very  expensive  •  First  lien  on  company  assets   •  Unsecured  (typically)  •  Nega.ve  covenants   •  BOD  governance  
  4. 4. Primary  uses  of  debt  •  Financing  assets   –  Working  capital   –  Fixed  assets  •  Financing  growth   –  Growth  capital   –  “Venture  debt”  •  Special  situa.ons   –  Bridge  loans   –  Financing  “near”  assets  
  5. 5. Think  like  a  lender  The  tradi.onal  credit  model   –  Primary  source  of  repayment:  cash-­‐flow   •  Ques.on:  what  is  the  probability  that  cash-­‐flow  will  be   sufficient  to  support  opera.ons  and  repay  the  loan?   –  Secondary  source  of  repayment:  collateral  value     •  Ques.on:  what  is  the  probability  that  the  liquida.on   value  of  the  assets  would  be  sufficient  to  repay  the  loan   should  the  cash-­‐flow  prove  insufficient?  
  6. 6. Think  like  a  “venture  lender”  A  twist  on  the  tradi.onal  credit  model   –  Primary  source  of  repayment:  cash-­‐flow  from   future  equity   •  Ques.on:  what  is  the  probability  that  the  investors  will   provide  addi.onal  equity  sufficient  to  support   opera.ons  and  repay  the  loan?   –  Secondary  source  of  repayment:  enterprise  value   •  Ques.on:  what  is  the  probability  that  the  enterprise   value  (IP,  customer  base,  licenses,  etc.)  is  sufficient  to   repay  the  loan  should  the  venture  support  prove   insufficient?  
  7. 7. Venture  debt  loans  •  Uses  of  capital   –  General  corporate  purposes   –  Financing  specific  fixed  assets  •  Security   –  First  priority  lien  on  all  business  assets   –  Typically  a  nega.ve  pledge  on  IP  •  Structure   –  6-­‐9  month  interest-­‐only  draw  period  followed  by  ~30-­‐36  month   principal  repayment   –  Few  financial  covenants   –  Standard  nega.ve  covenants  (i.e.  consents  needed  for  M&A,   subordinate  financing,  changes  in  management,  etc.)  •  Pricing   –  Interest  rates  in  the  high  single  digits  to  low  double  digits   –  Warrants  typically  equal  to  ~0.25-­‐1.00%  fully  diluted  ownership  
  8. 8. Think  like  a  working  capital  lender  Another  twist  on  the  tradi.onal  credit  model   –  Primary:  cash-­‐flow  within  the  working  capital  cycle   •  Ques.on:  what  is  the  probability  that  the  accounts   receivable  are  collectable  in  a  .meframe  sufficient  to  revolve   the  loan?   –  Secondary:  collateral  value  of  working  capital  assets   •  Ques.on:  what  is  the  probability  that  the  Bank  could  collect   the  accounts  receivable  and  liquidate  the  other  working   capital  assets  afer  the  Company  ceases  opera.ons?  
  9. 9. Working  capital  lines  of  credit  •  Uses  of  capital   –  Financing  working  capital  assets  such  as  A/R  and  inventory   –  Some.mes  includes  a  por.on  available  to  finance  POs  •  Security   –  First  priority  lien  on  all  business  assets   –  Typically  a  nega.ve  pledge  on  IP  •  Structure   –  Revolving  line  of  credit  with  formula  borrowing  base  (i.e.  80%  of  A/R)   –  Financial  covenants  to  measure  liquidity  (i.e.  balance  sheet  covenant)   &  performance  to  plan  (i.e.  income  statement  covenant)   –  Standard  nega.ve  covenants  (similar  to  prior  slide)  •  Pricing   –  Prime  based  interest  rates  ranging  from  Prime  to  mid  double  digits   based  on  liquidity  levels   –  Commitment  fee  ~0.5-­‐1.0%  and  perhaps  unused  line  fees  as  well   –  Warrants  may  be  included  if  there  is  an  element  of  “venture  risk”  
  10. 10. Recurring  revenue  lines  of  credit  •  Uses  of  capital   –  Mone.ze  value  associated  with  recurring  revenue   –  Support  sales,  marke.ng  &  product  development  as  MRR  grows  •  Security   –  First  priority  lien  on  all  business  assets   –  Typically  a  nega.ve  pledge  on  IP  •  Structure   –  Revolving  line  of  credit  with  formula  borrowing  base  (i.e.  1-­‐3x  MRR)   –  Financial  covenants  to  measure  liquidity  &  performance  to  plan   (similar  to  prior  slide)   –  Standard  nega.ve  covenants  (similar  to  prior  slide)  •  Pricing   –  Prime  based  interest  rates  ranging  from  Prime  to  mid  double  digits   based  on  liquidity  levels   –  Commitment  fee  ~0.5-­‐1.0%  and  perhaps  unused  line  fees  as  well   –  Warrants  may  be  included  if  there  is  an  element  of  “venture  risk”  
  11. 11. Ques.ons?   Dan  Allred  &  Glen  Mello   Silicon  Valley  Bank   dallred@svb.com  &  gmello@svb.com     Mark  Cameron   Mark  Lange   Sand  Hill  Finance   Boston  Financial  &  Equity  Corp.    mcameron@sandhillfinance.com     mark@bfec.com      

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