Venture Lending

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Venture Lending

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What is Venture Lending?

• Venture Lending could be any form of debt
  financing provided to a company which is venture
  backed financing.
• Venture Lending is provided by specialized banks
  or non-bank funds and used to fund working
  capital or equipment purchases.
• Venture Lending providers combine their loans
  with warrants, or rights to purchase equity, to
  compensate for the higher risk of default.
• Venture loans can provide a young company the
  extra time and resources needed to reach major
  product or customer milestones.

SVB presentation Venture Debt Maximizing Its
Value in the Current Environment, February 23,
2004
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Uniqueness Advantages

• Venture Lending loans have an equity component.
  Therefore, it provides cash to companies with
  significantly less dilution than venture capital
  investment.
• Unlike traditional bank lending, Venture Lending
  is available to startups and growth companies
  that do not have positive cash flows or
  significant assets to use as collateral.

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Benefits of Venture Lending

• For founders
• More cash, less dilution.
• For Venture Capital funds
• Leverage of equity enables financing of company
  with less additional investment.
• For Venture Lending funds
• High interest combined with equity kicker.

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Risks Involved

• High-Tech companies have limited revenues and
  tangible assets.
• Value of intellectual property is limited upon
  liquidation.
• Relatively high chance for Borrower company to
  dissolve its businesses, reflecting on actual
  capability to repay loan through seizure of
  charged assets.

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Which Companies Typically Obtain Venture Lending?

• Backed by strong VCs
• Have cash in bank for 18-24 months of operation
• Achieved (initial) sales
• Enjoy strong management
• Concept debt follows equity.

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Venture Lenders Target Investment

• Pre-Revenue Stage Company
• premier VC(s)/strategic partner(s)
• Significant market opportunity
• Credible exit opportunity
• Revenue Stage Company
• top line growth
• Exit visibility

Troy Zander, DLA Piper LLP, Shenhav Co. Venture
Lending seminar, January 31, 2008
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Bank Fund-Based Venture Debt (1)

• What do Venture Lenders care about
• Funding Risk the risk that next equity funding
  will not occur
• Equity funding is viewed as a key source of
  repayment
• Investor and prospective investor support is
  critical
• Lenders also consider whether investors are on
  top-tier or qualified list
• Lenders past experience with specific investors
  can be critical
• Management Team and Business Plan
• Potential for development of valuable
  intellectual property
• Performance Risk the risk that the company
  will be able to perform according to its business
  plan. Different from typical bank/asset based
  lending which focuses on asset values, revenues,
  profits, cash flow.
• Other factors management team, industry sector,
  product etc.

Troy Zander, DLA Piper LLP, Shenhav Co. Venture
Lending seminar, January 31, 2008
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Bank Fund-Based Venture Debt (2)

• Why do lenders make these loans
• Provides bank lenders with a hook for a valuable
  depository relationship following equity
  funding
• Equity-kicker or success-fee gives the lender
  an equity like return and enables it to share in
  upside
• Steady payment of interest and amortization to
  reduce exposure
• Often gives lender right to invest in future
  equity rounds, to enable lender access to
  successful VC-backed companies

Troy Zander, DLA Piper LLP, Shenhav Co. Venture
Lending seminar, January 31, 2008
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Bank Fund-Based Venture Debt (3)

• Why do companies take these loans
• Liquidity and runway extension
• Less dilutive than equity or convertible debt
• Warrants are usually a small percentage of
  capitalization
• Need for cash when valuation at perceived low
  point
• Access to debt financing before traditional banks
  will pay attention
• Relationship with lender and introductions to
  venture community and strategic partners
• May be able to negotiate no financial covenants

Troy Zander, DLA Piper LLP, Shenhav Co. Venture
Lending seminar, January 31, 2008
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Typical Deal Structure

• Loan facility of XXX M
• Company may drawdown facilities from time to time
• High interest rate (10-20 per annum)
• Warrant coverage (10-30 of loan)
• Commitment and other fees penalties apply
• Collateral Loan is secured by IP and other
  assets of the Company, granted as first priority
  charge

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Venture Lending Key Terms (1)

• Borrower entity (cross company Guarantees)
• Secured Guarantor Borrower, its parent or
  subsidiary.
• Administrative Agent lead Lender
• Lenders leader alongside with some other banks
  and financial institutions as may be arranged by
  lead Lender
• Facility (or Term Loan) of several MM
• Draw Period normally Term Loan must be drawn at
  Closing (Advance), but certain transactions
  allow routine drawdown from time to time.
• Term 24-36 months, while interest only for a
  defined period upon Closing.

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Venture Lending Key Terms (2)

• Interest on the outstanding balance of the
  Facility, payable monthly at an annual rate
  (10-20), fixed at the time of an advance.
• Fees fully earned, non-refundable commitment
  fee, due and payable at Closing.
• Warrants bearing similar terms as granted to
  other company Warrant holders, per latest
  investment round and with coverage of 10-30 of
  Term Loan.
• Prepayment Fee Term Loan can be prepaid at any
  time, with fee dependant on Term Loan evolution.
• Security Collaterals First priority charges
  on IP and proceeds (Fixed, Floating, Negative)
  other specific Guarantees.

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Venture Lending Key Terms (3)

• Other conditions certain VL funds require
  proceeds to remain in the US and to be repaid
  from a US entity.
• Information Borrower required to furnish
  Lenders with financial statements. On some cases
  VL fund requests similar information as provided
  to companys Preferred Shareholders.
• Facility Costs Due Diligence fees and other
  legal transaction costs all borne by Borrower.
• Exclusivity No-Shop Could reach up to 30-90
  days from Term Sheet execution up to signing of
  loan documents.

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Israeli Venture Lending Market

• Venture Lending is customary practice for VC
  backed companies.
• Israeli banks in general are not active in this
  domain.
• Strong Venture Lending funds with Israeli
  presence.
• Several strong US players coming to the market.

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Key Topics to Consider in Israeli Venture Lending
Transactions

• Structure of borrower (Israeli parent or Israeli
  subsidiary?)
• Security interest perfection and priorities
• Approval or consent of third parties (OCS ????
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• Legislative Liquidation restrictions (OCS
  others)
• Tax implications

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Structure Issues (1)

• Israeli High-Tech companies often opt for a
  Delaware parent Israeli subsidiary structure
  (Israeli Related).
• In other cases, Israeli parent has an active US
  subsidiary.
• IP can be located in Israel or outside of Israel
  (developed in Israel under a cost plus
  agreement).

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Structure Issues (2)

• Is borrower the Israeli company, the US company,
  or co-borrowers?
• Is there a cross guarantee?
• Is there a security interest in IP (or only a
  negative pledge?)
• In any case pledge of shares of subsidiary
  (Israeli or US) should be considered.

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The Security Interest (1)

• Israeli law allows a fixed charge and a floating
  charge (latter not allowed under US law).
• Israeli law also provides for several statutory
  liens which have preference over a floating
  charge but come second to a fixed charge.
• No Account Control Agreement is available in
  Israeli banks.

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The Security Interest (2)

• Priority of liens under Israeli law
• Fixed charge
• Statutory liens
• Floating charge
• Floating charge may have a covenant preventing
  the creation of fixed charges.
• Perfection 21 days waiting period prior to
  funding.

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The Security Interest (3)

• Statutory Liens include
• Compensation payments (subject to cap of
  approximately 3K per employee)
• Amounts withheld for taxes and not transferred to
  the tax authorities
• Municipal taxes
• Government taxes (capped at one year)
• Other taxes (which are less than 12 months in
  arrears)
• One year rental payments

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Warrant Issues

• Which class of shares (next round/previous
  round)
• Registration rights
• Preemptive rights, Right of first refusal
• Term
• Transferability
• Cashless exercise
• Automatic exercise prior to expiration

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Third Parties

• Chief Scientist Issues
• Consent upon perfection of lien
• Consent upon sale of IP outside of Israel
• Special buyout formula
• Special exception for buyout formula in case of
  insolvency
• Investment Center

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Tax Issues

• Taxation of interest income.
• Taxation of warrants.
• Taxation of other fees and charges.

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