Raising equity with debt outstanding
How outstanding growth debt or venture debt affects a later equity round, from lender consent and investor diligence to repayment, runway and closing.
In brief
- An equity round does not remove existing debt: the company must retain, amend, partially repay, fully repay or refinance the facility.
- New investors will examine the debt balance, repayment schedule, covenants, security, warrants and any existing or expected breach.
- Check lender consent and prepayment requirements against the actual transaction, and obtain written approvals before closing.
- Model net usable proceeds and post-round debt service; gross equity proceeds can overstate the runway the company is buying.
In this guide
- Why new investors care
- The four main outcomes
- Check the debt documents first
- Lender consent
- What investors will diligence
- How debt changes the runway story
- Should the new round repay the debt?
- Warrants and the cap table
- Recapitalisation and difficult rounds
- Plan the closing mechanics
- A practical sequence
- The bottom line
- Where to go next
An equity round does not make existing growth debt disappear. The loan remains a senior contractual obligation unless it is repaid, refinanced or changed with the lender.
That does not mean debt prevents a fundraise. Many venture debt facilities are taken with a later equity round in mind. The practical question is whether the debt still fits the company after the new money arrives.
Why new investors care
Equity investors own a residual claim: they receive value after creditors have been paid. An outstanding loan therefore affects the cash available for growth, the risks around the investment and the choices the company can make later.
A new investor will usually want to understand the amount drawn, undrawn availability, interest and fees, repayment dates, security, covenants, defaults, lender warrants and any lender consent rights. A warrant is a right to acquire shares on agreed terms.
Investors may be comfortable with debt that extends runway and funds a clear growth plan. They may be less comfortable if much of their investment will immediately repay old borrowing, if amortisation starts soon or if the company is already close to a covenant breach.
The four main outcomes
| Outcome | What it means | When it may be considered |
|---|---|---|
| Keep the facility | The equity closes and the debt continues on its existing terms. | The facility still suits the plan, no consent or amendment is needed and repayments remain affordable. |
| Amend or waive terms | The lender agrees to change selected terms or waive an existing or expected breach. | The new business plan changes covenants, repayment timing, ownership or other protected matters. |
| Partially repay | Some of the equity proceeds reduce the outstanding principal. | Investors want lower leverage or the lender requires an agreed paydown while the company keeps useful capacity. |
| Repay or refinance in full | The existing facility is cleared, possibly using a replacement loan. | The debt no longer fits, a new lender offers better terms or the round depends on removing the old facility. |
Do not assume any of these outcomes is available at no cost. Prepayment premiums, accrued interest, legal fees, undrawn commitment cancellation and security-release work can affect the funds flow.
Check the debt documents first
The signed finance documents, not the original presentation or term sheet, determine what the company can do. Review them early enough to solve issues before the equity round is announced as final.
Start with the following areas.
- Equity issuance and ownership changes. Confirm whether an ordinary issue of shares is permitted, subject to notice or consent, or could interact with a change-of-control definition. A normal financing round often will not change control, but the exact ownership and voting thresholds matter.
- Use of proceeds. Check whether new equity proceeds can be used freely or must be applied to debt in specified circumstances.
- Covenants. Rebuild financial covenant calculations using the post-round plan and capital structure. More cash may improve liquidity, but a new budget or slower growth case can affect other tests.
- Prepayment. Confirm notice, premiums, minimum amounts and whether a partial repayment reduces later instalments or the final balance.
- Security and releases. If the debt is repaid, identify the documents, filings and timing required to release security over assets and accounts.
- Warrants and information rights. Establish whether lender equity rights remain after repayment, adjust in the round or require notices or updated cap-table information.
- Existing breaches. A fundraise does not automatically cure a breach unless the relevant covenant is satisfied or the lender gives a written waiver.
Lender consent
Consent is formal permission from the lender. Whether it is needed depends on the loan documents and the proposed round. Possible triggers include an equity issuance restriction, a change in control, new investor rights, changes to the group, new debt, acquisitions or movements of cash and assets.
Ask counsel to produce a short consent checklist tied to the actual transaction. Avoid a vague question such as whether the lender is generally comfortable with the round.
If consent is required, explain the round, expected ownership, proceeds, updated forecast and requested decision. Give the lender enough time for credit approval and legal documentation. A supportive relationship does not replace a signed consent.
What investors will diligence
| Item | What to provide | Why it matters |
|---|---|---|
| Debt summary | Outstanding principal, undrawn commitment, maturity, amortisation, interest and fees | Shows the cash burden and remaining capacity. |
| Documents | Facility agreement, amendments, security documents, fee letters and warrants | Reveals rights that a summary may omit. |
| Compliance | Recent certificates, covenant calculations and any waivers or reservations of rights | Shows whether the facility is in good standing. |
| Forecast | Monthly cash, operating plan, debt service and downside case | Tests runway after both the round and repayments. |
| Security map | Borrowers, guarantors, secured assets and filing details | Clarifies creditor priority and release work. |
| Correspondence | Material notices and discussions about performance, consents or changes | Reduces the risk of a late surprise. |
Disclose issues early. A near-term maturity, likely covenant breach or unresolved lender request will usually be more damaging if it appears late in investor diligence.
How debt changes the runway story
An equity headline is not the same as usable growth capital. Start with gross proceeds and deduct transaction costs, any agreed debt repayment and other immediate uses. Then include interest, fees and principal payments in the monthly cash forecast.
For example, a £10 million round does not add £10 million of runway if £3 million must repay debt and the remaining facility amortises rapidly. Equally, keeping sensible debt outstanding may let more equity fund growth, provided the combined obligations remain affordable.
Show investors the cash position under at least three cases: the operating plan, slower growth and a delayed next financing or exit. Do not rely on future uncommitted equity as if it were cash already available.
Should the new round repay the debt?
There is no universal answer. Paying down debt lowers interest, principal obligations and default risk. It can also remove useful liquidity and use equity capital that investors intended for growth.
The decision should compare the cost of retaining the loan with the value of the cash and undrawn availability. Include prepayment costs, security restrictions, covenant headroom and whether the company could replace the facility later on acceptable terms.
A lender may prefer to remain in the capital structure after a strong round because the company has more liquidity and sponsor support. Alternatively, the lender or new investors may require a paydown. Treat the final position as a negotiated transaction term, not an assumed market rule.
Warrants and the cap table
Venture debt may include warrants. Outstanding warrants normally remain separate from the loan unless the documents say otherwise. Repaying the facility does not necessarily cancel them.
Before circulating the financing cap table, confirm the warrant holder, number or formula, exercise price, expiry, adjustment provisions and any exercise or information rights. Model warrants in the fully diluted ownership analysis using the same assumptions as other options and convertible securities.
Growth debt is different from convertible debt. A standard growth loan does not automatically convert into shares in a financing round merely because a warrant exists. Convertible instruments follow their own conversion terms.
Recapitalisation and difficult rounds
A recapitalisation changes the company's mix or terms of equity and debt. In a difficult fundraise, investors may require debt reduction, maturity extension, covenant relief or a change to existing shareholder rights as conditions to investing.
Those elements are connected. The investor may not fund without lender relief, while the lender may not grant relief without committed new equity. Use a coordinated term sheet, responsibilities list and closing timetable so neither side is asked to move without visibility on the other.
If the company is in financial difficulty, directors should take jurisdiction-specific legal advice promptly. Duties, transaction challenges and creditor considerations can change as insolvency risk increases.
Plan the closing mechanics
The closing funds flow is a schedule showing where money moves when the transaction completes. It should state gross equity proceeds, fees, debt payments, interest, any prepayment amount and the cash left in the company.
If repayment and security release occur at closing, agree payoff figures and release mechanics in advance. A payoff letter normally states the amount required and the conditions for releasing the lender's claims. Confirm how late interest or exchange-rate movements will be handled.
Keep a conditions checklist covering investor documents, lender consents, amendments, payoff steps, board and shareholder approvals, filings and evidence of funds. Assign a named owner and deadline to each item.
A practical sequence
- Build the post-round monthly model, including every debt payment and a downside case.
- Summarise the facility and review the signed documents with counsel.
- Decide the preferred debt outcome and an acceptable fallback.
- Brief the lender before the request becomes urgent, using the same forecast shown to investors.
- Give investors the debt pack and disclose any consent, waiver or repayment requirement.
- Negotiate lender and investor conditions together, then document them.
- Verify the closing funds flow, security releases and post-closing reporting dates.
The bottom line
Outstanding venture debt can sit comfortably alongside a new equity round when the repayment schedule, covenants and lender rights still fit the post-round plan.
The risk comes from treating the loan as background detail. Put debt into the investor diligence, runway model and closing timetable early. Then decide explicitly whether to retain, amend, repay or refinance it.
Where to go next
- What is venture debt? explains the earlier-stage product, structure and borrower fit.
- Managing growth debt after closing turns the signed facility into a practical operating process.
- Refinancing growth debt examines when replacing the facility can improve the structure.
- Warrants and equity kickers in growth lending explains lender equity rights and potential dilution.
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