Mercury

## What is Mercury Venture Debt and how does it provide non-dilutive capital to extend startup runway?

## Overview Mercury Venture Debt is a financial product structured as a term loan that provides capital to high-growth, venture-backed startups. It is considered a non-dilutive or minimally dilutive form of financing because it allows founders to secure funds without selling a significant portion of their company's equity, thereby preserving their ownership stakes. This type of financing is specifically designed to extend a startup's operational runway, typically by 6 to 12 months, providing a crucial bridge between equity funding rounds. The capital can be used for strategic growth initiatives, such as hiring key personnel, scaling marketing campaigns, or investing in research and development, which can help the company achieve milestones needed to secure a higher valuation in its next equity raise. ## Key Features Unlike traditional equity financing, where capital is exchanged for ownership, venture debt is a loan that must be repaid with interest. While it is largely non-dilutive, Mercury Venture Debt agreements often include stock warrants. These warrants give the lender, Mercury Lending, LLC, the right to purchase a small percentage of the company's equity, typically ranging from 0.5% to 5%, at a predetermined price in the future. This 'equity kicker' provides an upside potential for the lender, compensating for the higher risk associated with lending to early-stage companies that may not yet be profitable. The loan itself is integrated directly into the Mercury banking platform, allowing companies to apply for, manage, and track their debt obligations within the same dashboard they use for their daily banking operations. ## Technical Specifications The structure of Mercury Venture Debt term loans is tailored for startups. Loan sizes typically range from 30% to 50% of the company's most recent venture capital equity round. The total loan term can be up to 48 months and often includes an initial interest-only period of up to 18 months. During this interest-only phase, the company is only required to pay the interest on the loan, which lowers the initial cash burn and allows more of the capital to be used for growth. After this period, the company begins to repay the principal, usually through a straight-line amortization schedule. The loans include an origination fee but often do not have prepayment penalties, providing flexibility for companies that may wish to repay the debt early after a successful funding round. ## How It Works Mercury's underwriting process for venture debt is tech-enabled and leverages the real-time financial data available within a company's Mercury account. This includes analyzing cash balances, transaction history, cash burn rate, and the history of venture capital wire transfers. This approach streamlines the application process, requiring minimal documentation—often just four documents for due diligence. Instead of focusing on historical profitability like traditional banks, Mercury's underwriting prioritizes factors such as the strength of the startup's venture capital investors, the experience of the founding team, and the company's overall growth potential. ## Use Cases ## Limitations and Requirements However, there are specific eligibility requirements. Companies must be U.S.-incorporated, venture-backed (having raised an equity round within the last 12 months), and are typically at the Series A stage or beyond, though some Seed-stage companies may qualify. A significant limitation is that Mercury currently cannot offer venture debt to businesses operating in California. While venture debt offers significant benefits, it also carries substantial risks and obligations. The primary risk is the legal requirement to repay the loan with interest, regardless of the company's performance. Interest rates typically range from 8% to 12% per annum and are often variable, tied to a benchmark like the WSJ Prime Rate. Loan agreements may also contain covenants, such as a Material Adverse Change (MAC) clause, which can be triggered if the company's financial condition deteriorates significantly. Mercury also offers an 'Investor Abandonment' clause as an alternative covenant structure. In cases of default, the lender may have the right to seize business assets, including intellectual property, which may be held as collateral. ## Comparison to Alternatives ## Summary