medium · Private Credit loan-structures-instruments
A venture debt fund provides a $10M loan to a startup. The terms are 12% total interest (9% cash, 3% PIK) and warrants for 0.5% of the company's equity at a $100M valuation.
If the company fails and liquidates for $2M after two years, what was the primary risk realized by the lender?
- The dilution of the warrant value caused by the startup's inability to ever reach a 'Unicorn' valuation status.
- Interest rate risk resulting from the 3% PIK component being structured as fixed rather than floating over the two-year term.
- The breach of financial maintenance covenants, which should have allowed the lender to intervene and take Board control much sooner.
- The bimodal distribution of venture outcomes where lack of cash flow makes recovery highly dependent on enterprise value.
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