How to compare venture debt term sheets

To compare venture debt term sheets, translate each offer into the company’s cash forecast and downside case. The aim is to find funding that arrives when needed, has an affordable repayment schedule and leaves enough flexibility for the business plan.

The comparison should explain the trade-offs, not simply declare a winner from the margin or a weighted score. Cooley’s term-sheet checklist covers the interaction between draw timing, fees, security and warrants. Those terms need to be assessed together.

All dollar amounts below are US dollars. The worked offers are fictional, not market quotes or currency conversions. The calculation method can be used in other currencies; contract terms, benchmarks and legal consequences depend on the facility and jurisdiction.

First, normalise the business assumptions

Use one forecast for operating cash needs, revenue, fundraising and potential exit dates. Apply consistent reference-rate scenarios where offers use the same benchmark. If the benchmarks or currencies differ, model each explicitly rather than treating equal margins as equal prices.

Then apply the contractual differences. If one lender requires a full draw at closing and another permits staged borrowing, the draw dates should differ in the model. Keeping the business need consistent does not mean forcing both facilities into a schedule that one of them cannot provide.

Separate five outputs:

• Net financing cash received after deductions.
• Interest and fees paid, excluding repayment of principal.
• Principal repayments and total cash debt service.
• Debt remaining at each comparison date, including any capitalised interest.
• Potential equity dilution and warrant payoffs under stated assumptions.

Track unused cash as well as debt. Drawing early may provide funding certainty but creates interest expense before the extra cash is needed. Include any interest earned on that cash in a real comparison.

The comparison grid

Record the exact wording or document reference beside each summary. The Alternative Credit Council’s UK borrower’s guide, sample term sheet on page 27, illustrates why the borrower group, ranking, security and voting provisions belong beside maturity and pricing. It is a private-credit reference, not a venture-debt market standard.

Cash available is the first test

Distinguish funded cash from an undrawn commitment subject to conditions, and distinguish both from a tranche requiring fresh lender approval. Avoid calling an amount unconditional while closing or draw conditions remain outstanding.

For each tranche, map the deadline, notice period, milestone evidence, no-default test and any repeated representations. Cooley’s discussion of funding timing specifically raises tranche triggers and the time allowed to meet them.

If later funding is essential to the plan, run a case in which it is unavailable. Identify the date and size of the resulting gap, not just the reduced headline facility. A larger commitment does not solve a cash shortage if the conditions prevent a draw.

Interest, fees and repayment

For a floating-rate offer, identify the exact benchmark and calculation convention before comparing margins. The New York Fed’s SOFR page explains the overnight benchmark; a contract’s reference to Term SOFR or a compounded rate requires its own specified methodology.

Check where any floor applies. In a fictional formula of max(reference rate, 3%) + 7% margin, a 2% reference rate produces a 10% total rate. If the reference rate rises to 4%, the total is 11%. This illustrates a reference-rate floor; a floor on the total rate is a different formula.

Separate cash-pay interest from PIK interest, which increases the balance to be repaid according to the agreement. Show the capitalisation and compounding schedule rather than treating deferred interest as a saving.

List every fee with its base and payment date. Distinguish a fee on the commitment from a fee on drawings, and label fees that arise only on a particular event. Include prepayment premiums, minimum-return provisions and final payments where applicable. The costs guide covers these components in more detail.

Build the repayment schedule through the last maturity. HSBC Innovation Banking’s UK product description illustrates the transition from interest-only payments to principal plus interest. That distinction matters even when two offers begin with similar payments. Check whether a later tranche has its own term or shares an earlier final maturity.

Worked example: two fictional offers

Assume the company’s plan calls for $3m of gross borrowing at closing and another $3m immediately after nine complete months, at the start of month 10. It separately budgets for fees and debt service.

Offer A requires the full $6m to be drawn at closing. Offer B permits the staged draws below, with the second subject to a revenue milestone and continuing draw conditions. These are contractual assumptions for the illustration. Merely making A available at closing would not establish that it must be drawn then.

For the base calculation, B satisfies the milestone and draws the second tranche on schedule. Cash interest is paid monthly at one-twelfth of the annual rate on the balance before that month’s scheduled principal payment. Principal payments occur at month-end. There is no PIK, early repayment or other fee in this illustration. Tax, legal expenses, interest earned on unused cash and warrant value are excluded.

The first nine complete months

This snapshot ends immediately before B’s second draw and its associated fee.

B pays $262,500 less during this window, despite its higher rate, because it has borrowed less. Another $30,000 arrangement fee is due when its second tranche is drawn. A has already obtained the extra $3m; B still needs to satisfy the conditions for it.

At closing, net proceeds after the arrangement fee are $5.91m for A and $2.97m for B. The principal owed is still $6m and $3m respectively. Use net proceeds when testing whether the company has enough cash for its plan.

The same comparison at the end of month 24

By this date, both offers have advanced $6m in total. A has made 12 principal repayments of $250,000. B has made six repayments of $100,000 on its first tranche; its second tranche is still interest-only.

B’s lower cash outflow is largely a consequence of repaying principal later. It is not an equivalent reduction in financing charges. A’s $120,000 final fee is also still to come and is not included in this paid-to-date snapshot.

These are scheduled-balance comparisons, not early-settlement quotes. If the plan is to refinance at month 24, calculate the settlement amount for both offers on that date using the applicable prepayment and final-fee terms.

Follow both offers to their contractual end

B costs $467,500 more in nominal interest and fees over its longer contractual life. It also leaves capital outstanding for longer. That is a different service from A’s faster repayment schedule, so these totals alone do not establish which offer is better or provide an annualised cost comparison.

The three views answer different questions: immediate cash burden, debt remaining at a shared date, and total scheduled charges. Keep all three alongside the company’s cash forecast.

What if B’s milestone is missed?

The expected second $3m draw is unavailable. Relative to the planned gross borrowing, the company has a $3m funding gap at the start of month 10. The second $30,000 draw fee is avoided, but avoiding a fee does not replace the missing capital.

Do not retain the base-case conclusion while removing the second tranche from the cost model. Establish whether the company can reduce spending, raise replacement funding or change the milestone terms in time. Also test whether the same revenue miss affects other obligations.

A has more funding in hand, but that does not mean it passes every downside. Its minimum-liquidity covenant and faster principal repayments still need to work with the revised forecast.

Covenants, security and operating freedom

Run each covenant using its own definitions and testing dates. Show the first projected failure and remaining cash at that point. Revenue, recurring revenue, qualifying cash and EBITDA may be defined differently across offers.

Compare cure rights, grace periods and consequences. “No maintenance financial covenant” does not establish that the lender has no other protection: draw conditions, reporting obligations, restrictions and default provisions still need review.

Wilson Sonsini’s venture-debt explanation identifies security, ranking and consent requirements as relevant features. Compare the actual security package, including borrowers, guarantors, accounts, intellectual property and existing creditor consents.

Test likely decisions against each offer: an acquisition, a new subsidiary, an equipment lease, an equity raise or a sale of IP. Record the available exception or required consent. The same security headline can accompany very different operating restrictions.

Compare warrants in shares and outcomes

Coverage percentages are insufficient on their own. Compare the calculation base, exercise price, class, expiry, adjustments and when the entitlement arises. Cooley’s warrant checklist specifically asks whether the share calculation uses amounts drawn or the available facility.

For the fictional offers, additionally assume the same share class and a fixed $2 exercise price, with no adjustments. A’s 2% coverage on $6m gives $120,000 ÷ $2 = 60,000 warrant shares. B’s 1% coverage produces 15,000 shares per $3m draw, or 30,000 if both drawings occur. If B’s second draw never occurs, only its first entitlement arises under these assumed terms.

These are share counts and aggregate exercise amounts, not warrant fair values. A change in company valuation does not by itself change a fixed share count or ownership percentage; future share issuance, exercise method and contractual adjustments can affect dilution. Compare possible exit proceeds separately, using the rights of the relevant share class. Our warrants guide develops those calculations.

Financing assumptions need evidence

If repayment relies on an equity round or refinancing, distinguish a forecast from an enforceable commitment and check the conditions attached to any commitment.

The OCC’s December 2025 venture-lending bulletin distinguishes uncommitted future equity funding from reliable repayment support. It is supervisory guidance for OCC-regulated US banks, not a rule applying to every global lender. For this comparison, the practical question is whether the forecast assumes money that someone is actually committed and able to provide.

Assess execution separately from commercial attractiveness. Confirm credit approval, remaining diligence, conditions to funding and who controls the timetable. Check lender references and the amendment decision process; the lender-selection guide sets out further questions.

A decision method

1. 1Agree pass/fail requirements: essential funding dates, minimum liquidity and necessary operating permissions.
2. 2Model the same business plan under each offer’s actual terms, including a credible downside and a common potential exit date.
3. 3Compare paid charges, debt service, remaining debt and warrant outcomes separately.
4. 4Review covenant definitions, security and consent rights with finance and legal advisers.
5. 5Check approval status, closing dependencies and lender references.
6. 6Identify the three or four changes that would most improve each offer, then request revised terms.
7. 7Record why the selected offer works for the company, including the risks accepted and contingencies required.

Use weights only after the pass/fail checks

Weights are a judgement about the company’s needs, not an industry benchmark. Agree them before final offers arrive so the scoring does not merely justify a preferred lender.

On a five-point scale, a score of 3/5 in the 25% availability category contributes 15 points out of 100. Define what each score means and mark unknown information as unresolved. An offer that fails an essential funding requirement should not become acceptable because its other scores are high.

Term-sheet status and the negotiation list

A term sheet summarises the proposed offer, but its legal effect depends on the wording and governing law. Ask counsel to identify binding provisions, including any cost reimbursement, confidentiality or exclusivity obligations, and the lender’s remaining conditions.

Compare exclusivity length and scope with the steps still needed for credit approval and closing. Put the company’s preferred position, minimum acceptable position, lender response, owner and deadline into one issues list across all offers.

Prioritise changes that affect funding certainty, debt service, default risk or strategic freedom. For example, ask whether A can permit staged drawings, or whether B can replace a discretionary condition with an agreed measurable test. Any concession must be reflected in revised terms and rerun through the model. The negotiation guide explains how to trade terms.

Red flags in a comparison

• The model assumes a full draw merely because the facility is available.
• Different business forecasts or exit dates are used without explaining why.
• A conditional tranche or uncommitted equity round is counted as certain cash.
• Fees use the wrong base or disappear because the model stops before they fall due.
• Lower cash payments are described as savings without showing principal still owed.
• Covenant thresholds are compared without definitions and testing dates.
• Warrants are ignored, or ownership dilution is assumed to vary with valuation alone.
• An unknown term receives a favourable score instead of remaining unresolved.

The final comparison should let the board trace each conclusion back to a term, a calculation or an identified uncertainty. Keep the model and issues list aligned as lenders revise their offers.

Where to go next

• Growth & venture debt term sheets explained shows how to read the whole offer before long-form documents.
• Venture debt interest rates and costs builds a complete view of cash cost, fees and equity-linked value.
• Covenants in growth lending explains the promises and tests that govern the facility.
• Negotiating a growth or venture debt facility explains where borrowers have leverage and how to trade terms.
• Warrants and equity kickers in growth lending shows how equity participation affects shares, dilution and exit outcomes.