Every equity round sells a slice of the company. Venture debt exists because sometimes the thing you need — six more months of runway, working capital for a hardware build, cash to bridge to a milestone — doesn’t justify selling another slice at today’s price. It’s a term loan made to a venture-backed company that no bank would lend to on conventional metrics: pre-profit, light on hard assets, burning the money it raised. The lender is underwriting something else entirely — the quality of your investors, the size and recency of your last round, and the probability that someone will fund the company again before the loan matures.
That logic shapes every term in the documents. Here’s how it actually works in Australia, and where founders get hurt.
The Australian Market, Briefly
Venture debt is a small fraction of Australian startup funding — well behind its share in the US — but the lender base has thickened: specialist funds (OneVentures’ credit arm, Leap Capital, Partners for Growth have been the long-standing names), revenue-based financiers at the smaller end, and more recently bank money, with HSBC and NAB both running dedicated technology lending teams. Facilities typically run two to four years, sized at roughly 20–35% of your last equity round, with an interest-only period of six to eighteen months before amortisation starts. Pricing lands well above a mortgage and well below equity: cash interest commonly in the low-to-mid teens, an establishment fee, often an end-of-term payment — plus the warrant, which we’ll come to. Because the borrower is a company borrowing for business purposes, the consumer credit regime doesn’t apply — this is a commercial loan outside the National Credit Code, so the documents carry most of your protection (though the ASIC Act’s unfair contract terms and unconscionable conduct provisions can still reach a standard-form facility with a small-business borrower).
One thing venture debt is not: revenue-based financing, which advances against recurring revenue and is repaid as a share of receipts. Venture debt is a fixed obligation. The repayments arrive whether or not the plan worked.
The Document Stack
A venture debt deal is four documents deep:
- The term sheet — non-binding on economics, but usually binding on exclusivity and a work-fee deposit. Negotiate here; leverage evaporates once you’ve paid the deposit and started legal drafting.
- The facility agreement — the loan itself: drawdown mechanics (often tranched against milestones), interest, amortisation, representations, covenants and events of default.
- The general security agreement — the lender takes security over all present and after-acquired property of the company: the classic “AllPAAP” registration under the Personal Property Securities Act 2009 (Cth). That’s your IP, your contracts, your bank accounts, everything. The lender perfects by registering on the PPSR; from that point, every future lender, landlord and enterprise customer running due diligence sees a secured creditor sitting across the whole business. Lenders are diligent about perfection for good reason — under section 267 of the PPSA, an unperfected security interest vests in the company on administration or liquidation — so expect no sympathy when you ask them to carve things out. Ask anyway: specific releases for assets a customer contract requires you to keep unencumbered are negotiable; the general charge is not.
- The warrant deed — the equity kicker.
What’s usually absent, and worth confirming is absent, are personal guarantees. Institutional venture debt is non-recourse to founders; if a term sheet asks for a director’s guarantee, you’re looking at a different product wearing venture debt’s clothes.
The Warrant: What “Non-Dilutive” Actually Costs
Venture debt is marketed as non-dilutive. It’s less dilutive. The lender takes warrants — options to subscribe for shares — with coverage typically expressed as a percentage of the facility: 5–15% coverage on a $5 million loan means warrants over $250,000–$750,000 worth of shares, usually priced at your last round (or your next, whichever is lower — resist that “whichever is lower” formulation if you can). On most cap tables that’s sub-1% dilution: real, but cheap next to an equity round.
Mechanically, the warrant is an issue of securities, so the usual machinery applies: the offer needs a Corporations Act disclosure exemption (a fund lender will almost always qualify, typically as a professional investor under section 708(11)), and — the step founders forget — your shareholders’ agreement almost certainly treats issuing options as a pre-emptive-rights event and a reserved matter requiring investor consent. Get that consent at term sheet stage, not the week of drawdown. The warrant should also be modelled into your fully diluted cap table immediately: your next lead investor will price you on it whether you remembered it or not.
Covenants: Read the Subjective Ones Twice
Financial covenants in venture debt are often light — sometimes a minimum cash balance, sometimes nothing numeric at all. The danger lives in the subjective clauses:
- Material adverse change — an event of default triggered by the lender’s judgment that your position has materially deteriorated. In a company that’s designed to burn cash, an untamed MAC clause is a default the lender can call almost at will. Push for objective formulations and carve-outs for performance consistent with your board-approved plan.
- Investor abandonment — default if your existing investors signal they won’t support the company further. You can’t covenant your investors’ behaviour; at minimum this should require something concrete and written, not an inference from a passed-on pro rata.
- Cross-default and cessation-of-business triggers — standard, but check they don’t catch ordinary restructuring, a bridge round, or a pivot.
An event of default doesn’t just accelerate the loan. It hands an all-assets secured creditor the right to appoint a receiver — which, in practice, ends the company’s ability to raise equity at all.
Debt Meets the Next Round — and the Downside
The repayment profile is the real risk. Interest-only periods end; amortisation then eats into exactly the runway the loan was meant to extend. The classic failure mode is a company that borrows twelve months of runway and spends the last six of it repaying principal while trying to close a round — and new investors hate watching their subscription money flow straight out the door to a lender. Expect your next term sheet to address the facility head-on: repayment at completion, a renegotiated facility, or priority and consent terms agreed between lender and incoming investors.
Directors carry the downside personally. A fixed debt obligation in a cash-burning company sharpens the insolvent trading analysis under section 588G of the Corporations Act 2001 (Cth): the moment the board can’t point to a credible path to meeting the amortisation schedule, every new debt incurred is a personal risk, and the section 588GA safe harbour — with its demand for a documented course of action reasonably likely to lead to a better outcome, and its gating conditions on employee entitlements and tax reporting — becomes the board’s working framework, not a footnote.
When It Makes Sense
The pattern that works: raise venture debt alongside or shortly after an equity round, while the metrics that priced the round are fresh and the lender’s underwriting question — “will the VCs fund this again?” — has an easy answer. Size it so that, even fully drawn, scheduled repayments never consume the runway it bought; borrow to extend a position of strength toward a specific milestone that re-prices the company. The pattern that fails: borrowing instead of a round you couldn’t raise. Venture debt is leverage on investor confidence. When the confidence is gone, the loan doesn’t replace it — it forecloses on it.
This article is general information only, not legal advice — whether a facility helps or hurts turns on its covenants, its repayment profile and your actual runway, and the drafting varies widely between lenders. Viridian Lawyers advises Australian founders, startups and investors on venture financing, debt documents and the deals that combine them. If there’s a venture debt term sheet on your desk, get in touch before you sign the exclusivity clause.
