Venture debt, i.e. risk loans, is still a relatively new and innovative financing instrument in the German venture capital and start-up scene. In fact, this is a form of debt financing — originating in the Anglo-American region — which is granted to suitable growth companies by specialized providers, usually private debt funds. In the current difficult market environment for equity rounds, venture debt can play an even greater role in financing innovations in the future than it has to date. When drafting the contractual documentation for German deals, care must be taken to ensure that venture loans are sufficiently clearly distinguished from the legal institution of the shareholder loan and, in particular, from so-called equivalent third-party loans.
Venture loans are generally not a stand-alone financing solution, but a financing instrument that is used to complement equity financing rounds. Venture loans are often taken out between two financing rounds in order to finance the company’s further development until the next valuation-relevant milestone is reached. Another example of the use of venture debt is the bridge financing of later-stage start-ups until a planned IPO or exit, without (further) diluting existing investors on the way there.
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