Mercury

## Does Mercury Venture Debt require personal guarantees or equity warrants?

## Overview Mercury's Venture Debt product is a specialized term loan designed for venture-backed startups, and its structure includes specific terms regarding personal guarantees and equity participation. The product does not require founders or other individuals to provide a personal guarantee. This means that the personal assets of the company's founders and executives are not pledged as collateral and are not at risk in the event of a default on the loan. This is a key feature that aligns with the standard practices of the venture debt market, which typically secures loans against the assets of the business itself rather than the personal wealth of its operators. The underwriting process focuses on the company's performance, the strength of its venture capital investors, and its potential for future growth, rather than the personal creditworthiness of the founders. ## Key Features However, contrary to some financing products that are purely debt, Mercury Venture Debt does require the borrowing company to issue an equity warrant to Mercury. A warrant is a financial instrument that gives the holder the right, but not the obligation, to purchase a certain number of shares of the company's stock at a predetermined price (the 'strike price') within a specified timeframe. This component serves as an 'equity kicker' for the lender, providing potential upside that compensates for the high risk associated with lending to early-stage, often unprofitable, startups. The size of the warrant required by Mercury is described as 'small,' typically resulting in equity dilution of less than 0.5% for existing shareholders. The warrant coverage can range from 0.5% to 5% of the company's equity, and the specific class of shares, whether Common or Preferred, is a point of negotiation. The duration of these warrants is typically long, often lasting 10 to 12 years, and can extend up to 15 years. ## Technical Specifications The loan itself has a defined structure. The total term of the loan is typically 48 months (four years). This period usually begins with an interest-only (IO) period, which can last from 12 to 18 months. During the IO period, the borrower is only required to make payments covering the interest accrued on the loan principal. After the interest-only period concludes, the loan enters an amortization phase, where the borrower begins to repay the principal amount in addition to interest. The principal is typically repaid on a straight-line basis over the remainder of the loan term. For example, on a 48-month loan with an 18-month IO period, the principal would be repaid in equal installments over the final 30 months. Loan sizes are generally determined as a percentage of the startup's most recent venture capital equity round, typically ranging from 10% to 50% of the round's value. Interest rates are variable and are often benchmarked against the Wall Street Journal Prime Rate, with typical ranges falling between 8% and 12%. ## How It Works To secure the loan, venture debt lenders, including Mercury, typically take a security interest in the borrower's assets. This is often structured as a senior 'all-asset lien,' which can include the company's intellectual property. The loan agreement also includes covenants, which are conditions that the borrower must adhere to. These can be affirmative covenants (actions the company must take, such as providing regular financial reports) or negative covenants (actions the company is restricted from taking, such as selling the business without lender approval). Mercury indicates a flexible approach to covenants, offering a choice between a standard Material Adverse Change (MAC) clause or an 'Investor Abandonment' clause, which may be more appropriate for early-stage companies. ## Use Cases ## Limitations and Requirements Eligibility for Mercury Venture Debt is primarily limited to venture-backed startups that have raised an equity round within the last 12 months. While Mercury charges an origination fee to issue the loan, it does not charge prepayment penalties, allowing companies to repay the debt early without incurring additional fees. ## Comparison to Alternatives ## Summary In conclusion, Mercury Venture Debt is structured to be founder-friendly by not requiring personal guarantees, thereby protecting the personal assets of entrepreneurs. However, it is not purely non-dilutive financing, as it does require the issuance of a small equity warrant to Mercury as part of the loan agreement. This warrant provides Mercury with potential equity upside and is a standard component of many venture debt deals. The loan terms include a 48-month duration with an initial interest-only period, and the loan is secured by the assets of the business. This financing option is designed to provide growth capital and extend runway for venture-backed startups between their equity funding rounds.