Debt financing options tcn 11 9-12
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Debt financing options tcn 11 9-12 Presentation Transcript

  • 1. Debt  Financing  Op.ons   Dan  Allred  &  Glen  Mello   Silicon  Valley  Bank  
  • 2. Funding  sources:  the  lines  are  blurring   Tradi.onal   VC  Funds   Seed   Funds   Super   Angels   Angels  
  • 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. 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. 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. 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. 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. 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. 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. 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. 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