If you’re still deciding whether venture debt belongs in your capital stack — what it is, who lends in Australia, how to size and time it — start with our venture debt explainer. This post picks up where that one ends: you’ve chosen a lender, there’s a term sheet on the table, and a documents pack is about to land. What follows is the clause-level version — what each document actually does, and which terms are genuinely negotiable.
Your Leverage Expires When You Sign the Term Sheet
A venture debt term sheet is non-binding on the economics but typically binding on exclusivity and a work fee — a deposit toward the lender’s due diligence and legal costs. The moment you sign, you’ve stopped running a competitive process and started funding the lender’s lawyers. That’s why everything you care about needs to be in the term sheet: warrant coverage and strike price formulation, the end-of-term payment, when amortisation starts, prepayment fees, and at least headline positions on the covenants that bite. “We’ll deal with it in documents” is lender-speak for “you’ll accept our standard drafting.” You won’t get a better deal at long form than the term sheet records — negotiate before exclusivity, not after.
The Facility Agreement: The Cost Isn’t the Interest Rate
The facility agreement holds three things founders routinely under-read.
Drawdown mechanics. Facilities are commonly tranched, with later tranches available only if you hit milestones (a revenue level, a follow-on round) within an availability window that expires. Treat the committed first tranche as the real facility and the rest as an option. Each drawdown also repeats the representations — including, usually, “no material adverse change since the last round” — so the lender effectively re-underwrites you every time you take money.
The full economics. The headline interest rate understates the cost. Stack up the establishment fee (often around 1–2%), the end-of-term payment — a final fee, commonly a mid-single-digit percentage of the facility, payable at maturity or on early repayment — prepayment fees (often stepping down year by year), and the warrant. On a facility with, say, 12% cash interest, the true all-in cost routinely lands in the high teens once everything is modelled. Build the full cash-flow IRR before you compare lenders, because two term sheets with the same interest rate can be percentage points apart all-in.
The covenant package. Beyond the subjective triggers the explainer covers — material adverse change and investor abandonment — the day-to-day constraint is the negative covenants: a negative pledge (no other security over your assets), limits on new debt, restrictions on disposals, and restricted payments. Two traps for operating companies: a broad “no disposals” covenant can technically catch an exclusive IP licence granted to an enterprise customer, and a negative pledge can collide with ordinary equipment leases and financed assets. Negotiate permitted baskets sized for two years of growth, carve-outs for licences granted in the ordinary course, and cure periods on anything curable. Reporting covenants deserve a sanity check too — only promise the monthly management accounts and board materials you can actually produce on time, because a missed report is a default like any other.
The security itself — the all-assets general security agreement, perfected on the PPSR — is close to non-negotiable in form, but specific releases are not: if a signed customer contract requires an asset to be unencumbered, ask for the carve-out and expect to get it.
The Warrant Deed: Small Numbers, Long Tail
Warrant coverage is a percentage of the facility, not of your company: 10% coverage on a $3 million facility is warrants over $300,000 worth of shares, typically exercisable at your last round’s price. On most Series A cap tables that’s well under 1% dilution. The negotiable points are elsewhere:
- Strike formulation. Resist “the lower of the last round and the next round” — it hands the lender downside protection you’re not being paid for. Last-round price, fixed, is the founder-friendly formulation.
- Term. Warrants commonly run five to ten years and survive repayment. Repaying the loan early doesn’t unwind the warrant — it’s earned on signing, which is another reason coverage belongs on the term sheet agenda.
- Exit mechanics. The deed should say exactly what happens on a sale: automatic exercise (usually cashless) or cash cancellation. Check your shareholders’ agreement’s drag-along reaches warrant holders, or put an equivalent drag obligation in the deed itself — an unexercised warrant held by a non-party to the SHA is a genuine deal-completion risk.
- What the lender becomes. On exercise the lender is a shareholder, so the deed should pre-agree a deed of accession on passive-investor terms: no board seat, no veto rights, limited information rights.
Mechanically, issuing warrants is an issue of securities, so it needs a disclosure exemption (a fund lender will almost always qualify under section 708 of the Corporations Act) and, under most shareholders’ agreements, triggers pre-emptive rights waivers and investor consent as a reserved matter. Line up that consent at term sheet stage.
Where the Debt Meets Your Next Round
Your next lead investor will read the facility before they price you. Expect their term sheet to deal with it directly — repayment at completion, a refinanced facility, or priority terms agreed with the lender — and check your facility’s change-of-control and consent provisions don’t technically catch the round itself. One more cross-border wrinkle: if your lender is offshore, interest paid to a non-resident generally attracts Australian interest withholding tax (10% in most cases), and the facility’s gross-up clause will put that cost on you — so a foreign lender’s rate is not directly comparable to a local one.
What moves in negotiation: coverage and strike, MAC carve-outs for burn consistent with the board-approved plan, an investor-abandonment trigger that requires something in writing, basket sizes, cure periods, and prepayment fee step-downs. What doesn’t: the all-assets security, the existence of an end-of-term payment, and a MAC clause in some form. Knowing which fight is winnable is most of the game — it’s exactly the work our venture capital team does on these facilities, and as startup lawyers in Sydney we’d rather mark up your term sheet than your event of default.
This article is general information only, not legal advice — venture debt documents vary widely between lenders, and what’s negotiable depends on your leverage, your metrics and the market. Viridian Lawyers advises Australian startups, founders and investors on venture debt facilities, warrant instruments and the equity rounds they sit alongside. If there’s a documents pack in your inbox, get in touch before the exclusivity clock starts.
