Credit Facilities for Emerging Companies – What to Look for at the Term Sheet Stage

Many emerging companies turn to venture debt facilities to meet at least some of their financing needs. Venture debt facilities are typically provided to emerging companies that are likely to require further equity investments from their venture capital backers. Most of these facilities include a loan (term loan and/or a revolver, typically asset-based) and a warrant.

The demand for venture credit expanded greatly during the Great Recession, and shows no sign of easing. A majority of venture-backed companies now enter into a venture debt facility during their life cycles. Many enter into two or more venture credit facilities. As venture capitalists continue to be selective (either by choice or due to scarcity of funds) in their additional capital deployments, and as credit remains cheap relative to historical norms, demand from emerging companies for debt is likely to stay strong.

Latham & Watkins attorneys Evan Smith, Haim Zaltzman and Jim Morrone have co-authored an alert entitled “After the Fiscal Cliff: Credit Facilities for Emerging Companies – What to Look for at the Term Sheet Stage.” The alert highlights some of the key terms that Latham often sees in loan agreements for emerging companies and the related warrants.  Emerging companies often fail to address these terms at the term sheet stage; yet these terms are commonly reflected in the final documentation. This alert will be of interest to those representing emerging companies, the venture capital and private equity firms that invest in emerging and growth companies, and the banks and lenders active in the emerging growth field.

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