Venture debt term sheets: the warrants, covenants and triggers founders often miss

Why the term sheet matters more than the rate

Most founders shopping for venture debt fixate on the interest rate, because it is the number that is easiest to compare across lenders. But venture debt is rarely priced on rate alone. The real cost and risk sit in the warrant coverage, the covenants, and the events that let a lender demand repayment early. Two facilities with identical headline rates can be very different deals once these terms are factored in.

This is not a guide to what venture debt is or why scaleups use it alongside equity. It assumes you already know that. This is about the clauses that decide whether a facility is cheap insurance or an expensive constraint on how you run the company.

Warrant coverage: the equity kicker

Virtually all UK venture debt comes with warrants, the right for the lender to buy a small slice of equity at a fixed price, usually the price of the last priced round. Warrant coverage is typically expressed as a percentage of the loan facility, meaning the lender gets warrants worth that percentage of the amount lent, calculated at the current valuation.

The coverage percentage is negotiable and varies by lender, facility size and perceived risk. It is easy to treat this as a rounding error next to a large equity round, but warrants are permanent dilution that sits outside the option pool and outside any anti-dilution protection your investors negotiated. Ask your lawyer to model the warrant’s value under a range of future valuation and exit scenarios, not just at today’s price, because warrant value scales with company success in a way interest does not.

Covenants: the conditions attached to staying compliant

Covenants are ongoing promises the borrower makes for the life of the facility. Broadly they fall into two types.

Financial covenants require you to maintain certain metrics, commonly a minimum cash runway, a minimum revenue level, or a maximum burn rate, tested monthly or quarterly. Breach one and the lender can, depending on the agreement, restrict further drawdowns, charge default interest, or in the most severe cases call the loan early.

Negative covenants restrict what the company can do without lender consent regardless of financial performance. These often include limits on taking on additional debt, making acquisitions, paying dividends, or changing the nature of the business. Founders sometimes discover these restrictions only when they try to do something the lender did not anticipate, such as opening a new debt facility for a specific project or entering a new territory.

Before signing, ask for every covenant in plain English and walk through what would trigger a breach under a slower-than-planned quarter, not just the base case in your model.

Material adverse change clauses

Most facilities include a material adverse change, or MAC, clause, giving the lender the right to refuse further drawdowns or accelerate repayment if something happens that materially worsens the company’s prospects. This is deliberately broad and subjective. In practice, well-capitalised, reputable lenders rarely invoke MAC clauses aggressively because doing so damages their reputation in the market, but the clause exists and its scope varies enormously between term sheets. Founders should push for MAC language that is as narrowly defined as their lawyer can achieve, tied to specific, objective events rather than a general worsening of prospects.

Repayment triggers beyond the maturity date

Venture debt facilities usually specify events, separate from the scheduled repayment date, that trigger immediate repayment. The most consequential for founders is often a change of control clause, which typically requires the loan to be repaid in full on an acquisition. This means an exit that looks straightforward on paper can require finding cash to clear the debt before proceeds reach shareholders, which affects deal structuring and timing. A cross-default clause is also common, where defaulting on any other debt or material obligation automatically triggers default on the venture debt facility too, even if the venture debt itself is being serviced correctly.

Why the equity round underneath still matters

Lenders extend venture debt against the strength of the existing equity investor base and the cash already raised, not against revenue alone in the way a traditional bank loan would be underwritten. This means the covenants and triggers in a venture debt deal are often written with an assumption that the company will raise a further equity round within a defined window. If that next round is delayed or priced down, covenant headroom can disappear quickly, and the interaction between the debt terms and a future down round is worth modelling explicitly before signing, not after a covenant is breached.

What founders should ask for

Request a full covenant schedule and a MAC clause with named, objective triggers rather than broad discretion. Ask for warrant coverage to be expressed with a clear valuation mechanism and model its dilution at multiple future valuations. Clarify exactly what happens to the facility on an acquisition, a further funding round, and a slower quarter than plan, in writing, before signing. Independent legal advice from a lawyer experienced in UK venture debt, separate from the lender’s own counsel, is standard practice and worth the cost given how much of the real economics sits outside the headline rate.

Where to check current terms and guidance

Commercial terms, typical warrant coverage and covenant structures shift with market conditions, so always work from current lender term sheets and independent legal advice rather than historical benchmarks.