Venture Capital Glossary

Definition of debt financing

Debt Financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.

In early-stage companies we typically see this as a convertible note. It's a cost effective structure to raise startup capital. It's far less expenseive in legal bills to do this as opposed to doing a priced stock round. You dont set a final valuation, rather you set a "cap" value for the note. Most investors won't touch it if there isn't a cap. So if the Cap is at $5M, and your company is amazing and the next value is at $20M, those original note investors get in at $5M. You would also set a discount rate. Most notes we see are at 20% discount. This is the benefit to the investors for investing in the convertible note. When you do your next round of financing, those investors get in at 20% less, or the cap, whichevever is better for the investor. There is also an interest rate set. We often see anywhere from 4-6%.

All of our events have Angel Investors and Early-Stage VCs who invest in Convertible notes. Take a look at the events below:

  • Investor Cocktails and Dinner during SXSW March 10
  • San Diego VC and Angel Conference March 26
  • Orange County VC and Angel Conference March 27
  • Los Angeles VC and Angel Conference March 28
  • Miami VC and Angel Conference April 26
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