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Hey {{first_name}} 👋, I hope you’re having a great week! In the last issue, we discussed about SaaS Magic Number, and now we are moving with the next topic from Reporting content.

Let’s talk about ⬇️

Company at $6M ARR. Series A in the bank. Series B targeted for 18 months out.

The term sheet in front of them: $5M facility, 8.5% interest, 24-month draw period.

That's cheap money. Cheaper than almost any equity you'll ever raise. The founder saw it as free runway.

I told them not to take it.

Not because the terms were bad…they were good. Because the milestone wasn't real. The Series B raise required roughly $14M ARR, and the path to $14M ran through a sales motion that hadn't been proven at scale yet.

That's the thing venture debt does. It magnifies the consequence of missing a number.

Hit the target and the debt is fine, barely noticeable. Miss by 20% and you're walking into a Series B with $5M of debt on the balance sheet…which either compresses your valuation or forces the incoming investor to refinance it as a condition of the round.

The founder pushed back, reasonably. Debt is always cheaper than equity at any sensible valuation. True per dollar. But it ignores what the debt costs you in optionality.

So we modeled three cases. Hit the milestone. Miss by 20%. Miss by 40%.

The value destruction in the miss scenarios was bad enough that they passed.

Over the next twelve months they hit about 75% of target. The Series B took an extra quarter and closed flat.

Without debt, that was a conversation about a flat round. With $5M of debt sitting there, it would have been a much harder conversation.

Most founders think about venture debt when the equity round stalls or runway gets tight.

That's backwards.

The best time to negotiate venture debt is immediately after closing an equity round — when your cash position looks strong, your investors just validated you, and lenders are actively competing for the relationship.

By the time you actually need it, your leverage is gone and the terms reflect that.

Worth understanding what you're dealing with: lenders don't underwrite your profitability or your assets. They underwrite the probability that you'll raise another equity round and use that money to pay them back.

Venture debt follows venture capital. It doesn't replace it.

No institutional backing or credible path to profitability, and most lenders won't produce a term sheet at all.

The slide: "Non-dilutive capital — $4M venture debt facility." Presented under a header about preserving founder ownership.

What was missing: the warrants. Not mentioned anywhere on the slide, in the appendix, or in the verbal.

Two percent coverage. At the company's current valuation that's $80K of face value, which is genuinely small. At a 5x exit it's $400K of real dilution, and that number never appeared in a document the board saw.

Nobody was hiding it. It just got filed mentally under "small percentage of loan" and never modeled at exit.

The fix: any slide using the words "non-dilutive" must show warrant coverage modeled at 2x, 3x, and 5x current valuation. One row. It either supports the argument or it doesn't.

The interest rate is the least interesting number on the term sheet.

Here's a $3M facility at 11% APR over 24 months:

$660,000 on a $3M loan. A 22% effective cost once fees are in.

The end-of-term fee is the one that gets undercounted most. It's 3–6% of principal, due at maturity, and it never shows up in the conversation about the interest rate.

Compare that to raising $3M in a flat equity round: roughly 8–12% dilution. At a $30M valuation that's $3M of equity value, permanently.

The debt wins in most scenarios where you have a credible path to raising the next round at a materially higher price. The debt loses when you burn the proceeds without a milestone attached and the round doesn't come.

Sizing, for reference: 25–35% of your last equity round, or 30–50% of ARR, whichever produces the lower number.

Everyone negotiates the rate. Almost nobody models the covenants.

The minimum cash one catches people constantly. You sign a $2M floor while burning $600K a month, and eight months later you're at $2.3M with the covenant four weeks out.

I watched exactly this. Company with $4M of debt, $2M minimum cash covenant. Projected month-end cash for the following month: $2.3M.

The founder hadn't flagged it, because technically they were still compliant.

Here's what actually happened, which is different from what the documents say. We reached out to the lender proactively at the $2.3M projection. They didn't accelerate. They didn't threaten to. What they wanted was a weekly cash update, a revised forecast, and a written plan to stay above the line.

Then every operating decision for the next two quarters got reviewed against that covenant.

To get clear of the threshold, the founder factored receivables at unfavorable terms — roughly 4% of AR value to pull collection forward by 30 days. Month-end cash moved to $2.7M.

The covenant never formally restricted anything. It functionally restricted everything.

The real cost wasn't the factoring fee. It was two quarters of lost operating flexibility, in exchange for $4M that the founder later thought should have been equity.

The fix is mechanical: build a monthly covenant compliance model, and set your internal alarm at 120% of the threshold. Covenant says $2M, your alarm goes off at $2.4M. Named owner, standing calendar item.

Below 0.5. Stop scaling — CEO and board own that call. Then run a cohort churn analysis to find whether the problem is new-logo performance or retention erosion, because those need completely different fixes. Audit ICP by segmenting the last twelve months of closes by vertical, ACV, and company size. Where win rates and NRR are both strong — that's your real ICP, not the one in the deck.

0.5–0.75. Hold spend flat and work on conversion rate. A 20% improvement in demo-to-close moves the number more than a 20% budget increase at this stage. Then segment by channel and ACV, because that's where the leak is hiding. And model a churn reduction — going from 2.5% to 2.0% monthly often adds more to the numerator than any realistic S&M increase.

Above 1.0. Model a 20–30% S&M increase and calculate what it does to runway. But first, check for the thing at the top of this email: is the number high because you're efficient, or because you're capacity-constrained? Pipeline coverage above 5x forward quota with a small AE team is the tell. If that's the case, add closing capacity before you add marketing spend.

And track the trajectory. A number that went 1.4 → 1.1 → 0.9 over three quarters is deteriorating even though the current reading still looks fine.

Equity investors bet on your ceiling. Lenders bet on your floor — specifically, whether someone else will fund you enough to repay them.

Investor quality is the single biggest input. Tier 1 VCs who recently wrote a check tell a lender the next round is plausible.

Post-loan runway of 12+ months. They want you raising before amortization creates pressure.

ARR and growth. Sub-$2M ARR limits your options hard. Above $5M with 80%+ gross margin is where lenders get genuinely competitive.

Burn multiple — net burn divided by net new ARR. Below 1.5x reads as efficient. Above 2.5x raises real questions about repayment. Lenders adopted this because it's the same lens your next equity investor will use.

Customer concentration. One customer above 30% of ARR puts their security interest at the mercy of a single renewal decision.

Gross margin. Above 70–75% and the model works. Below 60% and they'll probe whether you can service debt through a slowdown.

If you can't answer all four cleanly, the preparation isn't finished.

What specific milestone does this fund, and how long does it take? "Six months to $5M ARR" is an answer. "General growth" is not a plan, it's a mood.

What's the all-in cost at my expected next-round valuation? Model interest, fees, and warrants at 2x, 3x, and 5x. Find the multiple where equity becomes the cheaper option.

Which covenants break in my downside case? Run the 40% revenue miss. Check every financial covenant against it. Anything that triggers gets renegotiated or removed before close.

Who owns monthly covenant compliance? If the answer is "someone will check," you've already planned your own default.

Venture debt is a precision instrument with a narrow operating range.

It works post-Series A, VC-backed, with a specific milestone on a realistic timeline, where the dilution cost of a flat equity round exceeds the all-in cost of the debt.

It fails as a safety net, as a substitute for a hard equity conversation, or as a way to buy runway with no path to repayment. The instrument doesn't save struggling companies. It extends runway for companies that are already going to make it.

Which means the decision is a modeling problem before it's a fundraising problem.

Know the all-in cost including the end-of-term fee. Model the covenant breach in your downside case. Define what the money actually funds.

Do that before you talk to a single lender — because once a term sheet is in front of you at an attractive rate, the downside scenarios are exactly what stops getting modeled.

That's how the founder at the top of this email nearly took $5M he didn't need.

Reply "DEBT" and I'll send the venture debt evaluation model — all-in cost calculator including the fee stack, warrant dilution at 2x/3x/5x, the covenant sensitivity scenarios, and the monthly compliance tracker with the 120% early-warning trigger.

Neighbour's dog has decided 6am is the time. So here we are.

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