The Venture Debt Masterclass | Marshall Hawks, Author, Venture Debt Deals

Hi everyone, welcome back to another episode of the Data Minute Podcast. I'm your host Peter Walker. Today I was joined by Marshall Hawks, the author of Venture Debt Deals in the lineage of Bradfeld's Venture Deals, which by the way, if you haven't read that book and you're in venture, you absolutely have to. So Marshall used to work at SVB, Silicon Valley Bank, and is one of the leading experts in how these venture debt deals actually get done. And there's a little bit of a stigma across venture when it comes to debt. Maybe it's been used to kill a bunch of earlystage companies that got overc capitalized. Or maybe you think it's just the province of massive latestage AI firms. Well, Marshall explains why venture debt can actually be a wonderful addition to your equity financing mix. And he gives you a ton of tips about dos, don'ts, the lenders to work with, and the types of terms to watch out for. Let's jump into the conversation now. Marshall, thank you so much for being

here. — Thanks for having me, Peter. — Um, you wrote a book. — I did. Why uh venture debt deals for everyone uh in the lineage of uh venture deals by Bradfeld who's quoted in the intro very kindly uh giving this book some props that it majorly deserves. — Why? Okay, so venture debt not everyone's first idea of a scintillating read. Why did you write this book? — You mean venture debt can't be an adrenaline-packed topic? — I mean when you in your hands Marshall definitely but in others I I'm not sure that we got there. Venture deals you mentioned back 14 15 years ago when it first came out I think was a siminal work in taking away some of the opaqueness of you know venture capital — investing these days almost a decade and a half later it's a lot more of a mainstream more well-known topic lots of online writing about it in addition to venture deals and some other books that are out there um but the venture debt as a topic or as a industry is you know less written about even to this day. So I sort of set about and had the idea, write as venture deals came out to write this book. I'm not sure 14 years ago I was the right guy with the right background, history, writing skill, whatnot to do it. But um start of 2025 decided to give it a go because I think there's a lot of nuance around how venture lenders think, how they operate, business models, just what are you going to see in a normal fundraising process — that I would spend for my 20 years in the venture lending industry. You know, a huge amount of my time educating entrepreneurs on how this just the industry worked, let alone here's the specifics of the transaction we might want to do together, — right? And so the book is a effort to try and just get the I don't know base level knowledge of this particular tool. It's can be used both good and bad ways for you know companies to help capitalize themselves. — Yeah. — Um just bring that base level knowledge up a little bit so that everybody entrepreneurs, investors, lenders can kind of start further along and maybe have quicker faster um you know relationships built or figure out when it's not a fit and move faster. just trying to save people time which I think venture deals helped do as well with you know the entrepreneur crowd who knew how venture funds operated at that point. — So I I completely agree that the book

is a great sort of primer on how these deals work, what's important about them, how to make them actually go in practice. But the last page of the book where you have a screenshot of a tweet, not always a great idea, but in this case I think it worked great. um where it's Paul Graham and I image shear and Paul Graham is expressing what I think I got to be honest is most people's view of venture debt at least when it comes to early stage startups which is never touch it like it'll blow up your company it's not a good idea etc — two questions one why do you think that view is so widely held — even amongst practitioners like Paul Graham who are anything but unsophisticated — and then secondly — why is it like — they're clearly not right in all situations. When does venture debt actually make sense for these companies? — Yeah, good questions. First of all, I aspire to be Paul Graham's level of writing skill at some point in the future, whether on Twitter or just in narrative form uh elsewhere. — And I think he is a he has a very valid viewpoint of which I have never asked him nor do I know him very well about what is behind those sort of shorter statements. But venture debt, like I mentioned, is a tool. It certainly can be used poorly and royally mess up your company. It can be used very well and have very meaningful impact on your business and the dilution that you're going to take across the span of a ventureback company's life cycle. All this is not unlike you know venture capital where that's can be overused can be underused. There's — give and take there for sure. Yep. What I think most people who have bad experiences or this kind of viewpoint again can come from very valid experiences they've had is that either maybe the situation with the company that they had something go sideways or multiple times that's happened. Maybe it wasn't the right time to use venture debt. Or maybe more interestingly or more directly, they didn't get the right partner and that partner didn't serve them well in the situation where maybe they wanted to borrow money and the lender said no. Or maybe they already had money and a lender more dramatically came in and you know called a default and took money back. I mean I think that's the criticism you hear from a lot of people. um benchmark as a firm historically had a pretty I think they still have a pretty anti-leverage or anti- venture debt viewpoint for some of those same reasons and some of the companies they had were SV portfolio companies and there's some um different outcomes that different companies had. So I think that's valid. But I think venture debt in my view is a again a tool if used well in the appropriate situations with the right partners can have um very significant impact on a company's trajectory. It's not going to be the reason a company is successful at all, but it can help optimize for who gets rewarded when there's a good outcome down the road. And I wrote about a number of those types of situations in the book with some case studies — 100%. So there there's two sections of the book that like kind of outline the guardrails in my mind. One on the lender side and one on the founder side. Is it the case uh maybe you just like rattle off what are clear situations where venture debt makes no sense? Like a founder should if you're thinking about it no go zone. This is not the

time. — Yeah. — Um generally when things aren't working which I realize is you know ventureback startups are an exercise in sort of fire management. You've got you know your hair on fire or a fire somewhere else. all kinds of fires that you have to just constantly struggle through. Uh I'm sure you and Henry and the company at Carter have had to, you know, do that over the years where something's always breaking. Yeah. So that's not really what I'm talking about. It's more of the — um you do you have signals that the product is either getting out into market as you expected, you've hit product market fit, uh or things are starting to ramp. If you don't have those and things are just sort of well, we're not really sure. we're just trying to um get further and not die. Um that's a good place for equity as opposed to leverage to come into play. You — do you do you get a sense of that as like you know would a blanket statement as bold as seed stage or below don't touch venture debt be useful or is it really more nuanced than that? — It's more nuanced. I think most situations are a little bespoke because you know a lot of companies have just unique dynamics going on where and frankly the nomenclature and you write about this I think a lot around you know seed and series A what those things mean and what stage of a company's life cycle those really entail I mean a hund00 million seed round is — could be out there these days uh you know the world's your oyster so I think it's more about are things not predictable to the you know 59s of reliability But there is meaningful milestones in the future that you reasonably think you can achieve and if you used the equity dollars you have plus some venture debt to get to those things they could meaningfully affect yeah — you know valuation when you go out to fund raise again. you that's a place where venture debt tends to be the most impactful earlier on in a company's life cycle and that's where mostly the venture banks are the dominant players the likes of my former employer SVB and a bunch of others — they're out there um a lot of times when somebody puts in place venture debt they are not drawing it immediately and that usually is going to help you avoid the downsides or negatives of um maybe some of the bad experiences others have referenced. I actually wondered in the Airbnb example that you gave in the book, — they basically never actually called Yeah. the dead. That was it was, you know, we can talk about the specifics there. The down payment for a new uh office building is kind of a wild story. — Yeah. Um how common is it for companies to go through the process of achieving that sort of loan and then never touch it?

it? — Very common. I mean I would say that's the majority outcome from my experience across four different firms is that — call it about a third of the people maybe 40% actually draw the capital maybe you know 50 60% you know never draw it or at least contemplate it and then something happens where they raise sooner — get acquired go out of business whatever the thing may be and decided never to use the capital so again these earlier stage companies call it series B and earlier barring some outliers that's mostly venture banks where they're going to a lot more willing given their source of funding is just deposits that they have. Cost of capital is lower. — They're willing to give people time frame to decide to use the capital and that's where you can sort of wait and see like are we hitting the things at the company level that are at least in the realm of where we think we were supposed to be. Obviously most people's projections and forecasts in early stage or just tech in general the one thing you know is they're wrong. You have a question of which direction. So you I think that's where um people you can still avoid the problem of having too much leverage or a partner who might be scared by waiting to see are things working out um like we thought they were and then we can draw the capital and then obviously you hope you've picked a good partner in the first place to be alongside you for the ride. So on that subject of the picking of said partner uh kind of illustrated two different camps of lenders which is the venture banks and then the private credit funds and then maybe slightly more esoteric vehicles. Um pros and cons on those two partners if you're a founder looking to make a

choice here. So venture banks talked about sort of they focus more so on the earlier stage let's call it series B and early not that they don't work with later stage companies but their business models are very different where they are trying to typically acquire companies very early work with them for the duration and they use venture debt um I guess on the margins some might think about it a little differently but almost all of them think about venture debt like customer acquisition finance — a loss leader yeah — um not say loss leader but the actual the cost of bringing in a company and you hope amongst a hundred companies that you're working with that a small subset become the Airbnbs of the world and a bunch of them stick around for a long time and hopefully not too many of them you know fail out spectacularly early on. So that's where venture banks play usually up to about 30 in today's market about $30 million is what I would say the upper end of where they're going to be able to provide venture debt the size of the structure — and is there typically a time frame associated with that 30 million or you're raising 20 million from a bank. Is there any are like are there any uh points in the deal at which it's sort of look you didn't use it it's gone or is it really like the time frame is kind of generous depending on the deal? — Um it varies depending on the deal. Most bank deals are going to have a time frame called the draw period where you have the optionality to decide whether to use the capital or not. That could run as short as 6 months. More commonly it's something like 12 to 24 months. So a pretty decent runway. Um, within that same time frame, if you decided to draw the money, there's typically something called an interestonly period where you borrow a couple million bucks. You don't have to start paying principal immediately. You just pay the interest on it. And then at some point, there is a repayment or amortization period. Um, usually two or three years. So, in total, most venture debt facilities from banks are going to be, you know, four to five years in total duration. And you'll have a year or two typically to decide to draw them. um past that $30 million mark for later stage companies, series C and beyond, um private credit becomes the much more prominent player. Private credit as an asset class is huge and lots of stories about how it's

grown, but also some of the early innings of problematic things in Blue and some others. Yeah, — venture debt within private credit is a pretty narrow slice of that world. But they come in and provide even, you know, larger chunks than I've experienced in almost all of my career, particularly in the last couple of years. Sort of 30, $40 million used to be where most private credit firms played. These days, 7500, couple hundred million is not unheard of, relatively frequent. Most of the big private credit players in the venture lending space can speak for those kinds of quantum. Yeah, — that's a narrower subset of companies typically when things are really either optimize or maybe completely displace a growth equity round with this debt capital and you know we're close to either break even we're close to a outcome of some form M& A IPO um you know the business models of those firms private credit are different they raise thirdparty capital not unlike venture capital firms and are trying to deploy that for return. They're not a bank. They don't care where you bank. None of that matters. — So, um cost of capital is more expensive in private credit land, less expensive in venture debt land. Usually the deal sizes though in private credit are bigger. Most time a little bit more flexible. Um the opposite would be true in venture debt. Uh sorry, in venture banking land. Uh private credit allows you to bank wherever you want. Venture banks are going to want at least your primary banking and the bulk of your deposits at their institution. um these folks, you know, don't interact with each other too much anymore. That sort of the early stage market, most private credit firms have sort of let the banks play there and the upper end is where they want to play. Um — why wouldn't a private credit firm want to go down market? — Because they can't compete on price. Uh you know, there's a 500 to 600 basis point delta in the cost of capital that you're going to borrow. even if it's the greatest private credit firm on the planet and they're great partners, that's a pretty big — um hurdle to get over. So, you know, venture banks have continually sort of eaten up more of the market. And ironically, the upper end of private credit has continued to get much bigger and bigger. And frankly, a lot of private credit firms like I don't want to spend time doing five and$10 million deals. I can fund $200 million to build a GPU cluster for an AI company. Like, that's great. And we can make, you know, mid teens returns. Like that's — yeah pretty awesome. — That's awesome. Um so that's not all the pros and cons between both parties. Uh and you know certain situations will be edge cases for the landscape I've just described. But that's the general sort of I don't know pros and cons but also the below 30 and above 30 is where the different players sit. Do you find that when a company is considering venture debt for the first time, who is typically uh the person or the people who are generating that as an idea? Does it is it the founder coming to you uh on their own accord and saying look we think adding debt to this mix makes sense? Is it often the venture fund saying you know in addition to this equity round we should consider mixing in debt in some way shape or form? Like where does that idea generally come from? most commonly unless it's a repeat entrepreneur who's experienced the you know pros and cons of starting a company prior whether it was good outcome or bad outcome they've sort of and what Carter I'm sure does around cap table management they've sort of gotten to appreciate the impacts good bad or otherwise of dilution um that's when it might come from an entrepreneur more commonly it comes from either board members who think it's an appropriate time or an interesting tool to use or if it's a uh they have a VP finance a controller CFO or somebody who's a consultant not fulltime but part-time who has experience sort of using that kind of leverage — they might bring that up again doesn't mean that everything is a perfect situation for venture debt but that's the two paths you more commonly see the discussion start and then an entrepreneur CEO founder particular the first time a lot of times they have to get educated sort of the whole point of the book here like I mentioned is that um you have to sort of wrap their heads around how to use that tool both for good and bad ways but like they're the people have to be educated the most Yeah. It uh part of the examples that you give struck me because you know it starts off you think of venture debt as this kind of more sophisticated banking mechanism. It's credit markets and all this kind of stuff but it's you know you going to startup offices and saying is this a scam? Like we're looking for CS on the floor or just like oh this is not a PO box. This is a real address. That's kind

of where some of this starts. I mean, yes. The I think I put it in the book. I can't remember where, but the example I give is Looney Tunes. I don't know if you watched Saturday cartoons back in the day. I did. My parents would let us watch TV that uh on Saturday mornings and there was Yuseimity Sam and the Roadrunner. And Yuseimity Sam would always be running around generally getting beaten by the Roadrunner, but also a lot of times he'd have a dark cloud over his head and his head only and it was just raining on him all the time. And I've kind of described lenders that way over the years. Doesn't mean you're pessimistic. By definition to be in the industry you kind of have to be an optimist and be willing to suspend disbelief but at the same time you are constantly trying to figure out what's not working in a company. What are the things that are going to be risks? How do we mitigate them? At the very basic level it's is this a real company building a real thing. Not that it's going to be successful but that it's not fraudulent. It's not um stuff that's been made up which is not all that common in — it happens. Uh it's happened increasingly postcoid because of the dynamics of not having physical presence depending on the company. — Interesting. — But it's still compared to most commercial lending. — Way lower in the venturebacked ecosystem because the venture firms you know insert your joke about quality of VC diligence here but they generally are doing that kind of sniff test. — It's a credibility layer on top of doesn't mean that you anybody's going to be the next Airbnb or a successful company, but at least yeah, it tends to filter out a lot if not most of the fraudulent dynamics. Um, but yes, when we when a lender shows up into an office, one of the many things that they are doing is just like, is this a real company? And also, what are how do I feel? — Yeah, you were like judging the vibes of the place like trying to read the energy of these people. are they committed and energetic and like you know fully bought into this idea which I hadn't considered as a credit mechanism or lending checkbox. — It is not the primary thing you do but it's certainly on the margin where you might say — wow I would like to be as aggressive meaning provide more capital more flexibly trying to win the relationship with this company than I would have otherwise because of something on the market. you're going to go back and argue with your the rest of the committees and the credit teams and being like, "No, we need to this is some this is like a special place. We have to be their lender of first resort here. " — Yes. Just like a venture capital fund within a partnership meeting on Mondays where they're going to make a decision. You know, every lender whoever senior is going to have a committee or an approval process where they are going to have to convince others that this is a company worth both providing capital to and then if you have to stretch sort of why how aggressively and stuff like just how does an office feel can add to or detract from whether you really want to do that or not. Is it most is it the case where most deals there is a expected dollar amount coming into the deal or is that sort of agreed upon throughout the negotiation process? Most of the time a company is going to show up or board or everyone involved and they're going to say, "Okay, we've done the thought process around what we're trying to solve for with this capital and therefore to get the runway we think we need or get to the milestones we're trying to achieve, we need $5 million, $20 million, $50 million, you whatever the number is. " So, typically there's a starting point. — Um, doesn't mean that's where it ends up. It could be that maybe people think that's too much in the lender community and it's less. I would say more commonly um some lenders might try to win a deal curry favor by yeah coming over the top of the ask if you will instead of 20 here's 30 — and you know the economics aren't that big of a delta to make it that problematic and someone at the company says well great we'll take 30 instead of 20 — you can quickly you have to be careful about quickly getting overlevered sometimes in these situations but you know in general you know more capital at least as options to choose from is not a bad thing but most the time a company and board is going set the dollar amount that they'd like to see from people and then evaluate all the other uh economics, terms, restrictions, if there are any covenants, things like that uh from the different lenders. — Totally. And is there a um when it comes to the I hadn't considered, but I probably should have given the way that venture funds work that akin to that during a fund raise of a on the debt side there would be sort of competing term sheets. — Yeah. And there's going to be multiple players that are offering, you know, a higher uh a higher level of debt or different covenants or different warrants or like we're willing if we're your bank to do something for you that people that are not your bank are not willing to do. What's the um what's the competition like in the venture banking debt community? — Pretty fierce, right, these days? Sorry. It was always fierce in my entire 20 years at SVB and other lenders that I started my career at. But post March of 23 where SV — what happened in March of

— I had a lot more hair and it wasn't gray uh before March of 23 thankfully survived the failure that SVB had and then you know the bulk of the organization in the US continued on as part of first citizens — right — uh they continue to be the plurality player I would say they're not quite the same 800 lb gorilla partly because the international operations went away when you know banks fail the local country regulator does what they want to do with those entities. Uh and then there was some attrition here in the United States. So there's a number of net new entrance into the innovation and venture banking space. Uh Steifil in particular uh HSBC had uh a new arm start as well here in the US. But then some other practices like JP Morgan and others that reinforced with some alumnest of SVB. So in general there are more credible venture banking and lending players than there ever have been to the benefit of you know entrepreneurs out there which means it's competitive and there's a lot of you know check and balance of you know nobody uh SVB included where I spent a lot of time over the years thinking maybe we might have proprietary deal flow there's certainly not proprietary deal flow these days again not unlike venture capital where you're expecting to get market checked and you sort of have to think about what's the appropriate risk adjusted return and structure you should ask for at the same time you got to play the game on the field. — Are they shopping the term sheets though? Is it like is it you know how does the uh how does that competition actually come into play because on the you know — in the VC community it's it gets pretty harsh and rough and the terms you play off each other in interesting ways. — Yeah. Yeah, I mean I wouldn't it's probably not maybe that quite bare knuckle, but it's pretty robust competition for very high-profile companies that are the hottest newest thing or the biggest and uh most impressive AI company on the block is going to get a lot of, you know, term sheets these days. Uh, funny enough, I'm sure like venture capital term sheets, in fact, I know it's in there, but in venture debt term sheets, there's sort of the please don't share this with anybody else other than on like needs to know basis or fiduciary reasons. Uh, so what's funny is I've never been asked to share any of the term sheets I've issued over the years yet. I've been the recipient curiously of a bunch of other venture lenders term sheets oddly enough — just appear on your doorstep. — Yeah. Uh from the companies where we might be competing and so you sort of Yeah. You're going to get a lot of check and balances there. Um and generally you'll find if it's a company that's you know attractive enough to have multiple lenders involved. They're going to kind of coales around private credit and venture lenders will have differences. But if they're all venture banks or private credit, they'll sort of coales around a relatively similar — economics, cost structure. And I think a lot of the decisioning hopefully in most cases comes down to like who are these firms? Are they quality partners? And do you feel like as a entrepreneur, board, CFO, you can um build a meaningful sort of trustbased humanto human relationship? Because at the end of the day, all this lending and all the specifics I wrote about in the book are all fine and good, but it really comes down to like, do I trust Peter and what he's telling me about his company and is he proactive in communication and am I to him? Like all those things play into in fact drive most of the decisioning around um how flexible or not a lender is going to be. — I'd imagine so. It that actually the relationship aspect stuck out to me a lot, especially in the negative side. You know, we mentioned there was a either like a mini chapter a part in there where you're talking about like the special assets ad like even the names of the lenders who you get introduced to when things are not going very well like the names themselves feel ominous like they it's just like a

different vibe. And then you spoke about how perhaps the original team kind of like almost rolls off the company relationship like talk a little bit more about how those individual persontoperson relationships work in those kind of situations. — Um yeah it depends on the type of lender. So banks are going to be more people in general covering more of the market because you know startup land is a bit of a pyramid. More companies at the early stages start to fall off over time as you go from C to series A to series B and C and beyond. So there's just more coverage needed from venture banks. Um, but that means you might start with someone like me uh in a lending relationship and if for some reason a company is going sideways to the degree where there's real risk of perhaps loss or near-term failure, — uh, usually another group within a bank will get involved uh, called the workout group, special assets, advisory services. Different banks have different nomenclature for it. — And it doesn't mean that the company's going to die and you're going to get taken over. It depends on the bank's perspective certainly, but you companies in the innovation ecosystem tend to have very dynamic sort of life and death moments. — Well, even the ones that do well. So, you know, most banks understand that and aren't going to be um — uh too quick to sort of drop the hammer on somebody and they know that those companies are going to maybe graduate back out of whatever problem they were having and carry on and maybe be wildly successful. So they try to play nice, but that second group that comes in could potentially take over the entirety of the relationship and, you know, be making decisions, good or bad, about what that lender is going to do as opposed to me as the person who started it. Not every bank does it, but a lot of them do that. And there's good reasons for perhaps why they have that delineation. Private credit funds because they tend to be smaller, less people, — they have to wear more hats, the same folks. — Same folks. That doesn't mean you're going to get more flexibility, by the way. It just means that you don't necessarily have to build a relationship with a new person, — right? — Uh — you're sending the emails to the same person, but you're not getting as many responses. — Yeah. I mean, it's usually situation specific for every but you don't have to do that relationship handoff. And those private credit firms, the people involved tend to work through the good and the bad of the situations that might be happening in their portfolio. And I think people just need to be cognizant of from the company side like who am I talking to? What specialist person is going to be here the whole time? Or maybe it's a BD person and they're just going to walk out the door the day the deal closes and then Peter shows up. Same thing that you have uh candidly with a lot of venture funds these days where it's like is my partner going to be there in three years? Am I doing with a junior partner at a mega fund? is like, you know, and then once they leave, am I, you mentioned this in the book, am I the orphaned portfolio? Yeah. Uh, company amidst uh, you know, one of these billion dollar funds and I just don't get the attention that I used to. — Yeah. I think certainly in venture funded companies the GP and sort of the fund dynamics are going to be a bigger driver than the lending side, but the same — sort of quasi power dynamics are true within banks and private credit firms where and we talked about it before these people that you at the company level might be interacting with. If you're talking to me as your lender, Peter, um I'm all fine and good, but I'm going to go talk to an investment committee or a credit committee behind me. And my ability to um articulate what the company's doing, good and bad, pros and cons, but also my own credibility within the organization is going to play into — how much capital we can provide at what terms and then as you go forward, if you carry the day, if you need flexibility on the company side, how flexible or not we're going to be. and if I walk out the door, you know, that at minimum is not going to be any better off in all likelihood and you're probably going to lose a ton of that institutional knowledge. Again, just like when a GP and the churn we've seen in I think the venture ecosystem particularly in the last couple years um can really negatively affect a portfolio company through no fault of their own which is the worst part of it that they just kind of get hammered — completely context independent you know it's just kind of a force of nature at that point. — Yeah. So, I can't get Marshall on my debt deal anymore because SVB. Very sad. What am I looking for as a founder? What are what green flags or red flags of like the person that I'm interacting with at — at the either the venture bank or the private credit fund?

— Yeah, it's it might vary a little bit between both types of firms, but in general, I think the same things would be true. You're looking for someone hopefully at least involved that's going to be a more senior member of the bank or firm. Doesn't mean you have to interact only with senior people. going to ask cuz it's like you know everyone would like a senior person but there's got to be junior people who are getting their feet wet and their first couple deals and all that kind of stuff — and junior people are not I was a junior person for a good chunk of my career and the benefit of a junior person is they're going to be attentive detail- oriented they can be great — what I think you want to make sure is there's at least a senior person who is involved at the outset and that you keep connective tissue with for the duration and just because someone's senior also doesn't mean that they're necessarily credible or the most wellrespected person in their firm. So you can think of just like putting someone on your board. It's not quite that degree. You know, when you take on venture capital investment and someone joins your board, kind of like getting married. That's the analogy. — Sure. — Venture lending is probably more like, I don't know, long-term girlfriend boyfriend. You can swap people out easier than venture investing. But the same kind of diligence and reference checking of um okay, Marshall's going to provide you capital and how has he done in good situations and bad in the past. Where is he? — So, you're actively talking to other founders who have worked with Marshall in the past. You're getting opinions on, you know, how he acted. — I would argue that's probably one of the more important things to do that I'm sure I'm not sure actually happens all that frequently to be honest. People might reference check the firm, — right? — That matters too by the way because it's not always going to be Marshall making the decisions. I think both things are relevant but particularly okay who is Marshall or Peter worked with what are the good outcomes — is that easily is that easy to find out — um you could ask the person obviously they're going to give you names that are the good references um you know LinkedIn sort of triangulating can help uh you can look at portfolio companies that are listed on you know particularly a private credit funds site they're going to be a little more directionally correct banks work with too many companies to make that really all Right. — Probably the biggest reference points would be your board. — Yeah. — Uh your outside council who might even be the best of all those because if they're a active long-standing, you know, member of Silicon Valley, so the Finwicks and Coulies and the Orics of the world, like they can give you the litany of situations they've been on, you know, the company side of from a variety of lenders, both of banks, private credit funds, who's good, who's bad, — individuals invol. I mean that's probably your best reference um reference checking sort of stop and then sort of CFO VP finance crowds if you have somebody at your company who's at that level great but they can also sort of usually network within their sort of similar peer group and you can get a lot of reference checking there if you want to spend the time and effort which I think is — and you might not see the value of it in a situation where you don't need something extra or on the margin but in the cases where it's really going to matter like that may be — um the difference between getting what you need and maybe a lender who gets uncomfortable and shut down your company. It's like that's the kind of thing that uh I think is worth pay dividends really strongly if something happens that you were not expecting with — for sure although obviously every entrepreneur you know finite amount of time in a day so I can appreciate that you have to sort of prioritize things um

with what else you have going on. — Of course. Is there a um you actually brought up the legal side of this. I wonder if there's any uh advice or like big highlights that you would take away from the legal process once you have ironed out uh the terms economic and control and everything like yeah — when uh when do lawyers get involved and what is their like role in the whole process? — Yeah, I had uh two great firms actually contribute some content to the book that you're probably alluding to. Fenwick and West on the company side, been around for 30 plus years. uh Sam Angus and Eric Shedlowski uh were the people who wrote for their on their behalf. Sam was actually on the other side of the Airbnb sort of relationship that uh I spearheaded on the lender front and then DA Piper Lorie Hutchkins who leads their sort of venture lending practice uh and did a ton of work for SVB and a bunch of other lenders out there over the years. they sort of gave some pretty pointed interesting feedback um around sort of just almost I didn't have them debate but I my initial thought was should I was we did we ironically we all debated whether how what was the best way to have them articulate — um both the company viewpoint and the lender viewpoint not from a any specific deal we're talking about but like why are certain terms going to show up in a legal agreement — why are they necessary from the lender view what on the company side should you try to push back on or not. Um, but let me take a level just up to answer your question. The thing that I would tell most founders to do, which I think is pretty common, uh, it's not that uh, frequent that someone does this, but over the years, someone might have a general counsel or an in-house lawyer at a company. Relatively early on, could be depending on the type of company, particularly in the fintech world, that might be more common. — Lawyers can be great. general counsels at a company can be awesome in allowing a company to navigate all kinds of risk and uncertainty. where they tend to be less great is on negotiating at least venture lending transactions and the specific nuances of them to the degree where I've never had a process involving a general counsel go faster or be less expensive u because the GC typically doesn't want to involve outside counsel to save money and they think that is also going to save them time — right and it turns out neither one is — neither tends to be true so what I would tell you is in general and none of the law firms I talked to actually paid me to say this but I would say I 100% agree that even if it's frustrating to pay legal bills, I think it's well worth the time to have somebody who is a frequent participant in the innovation ecosystem, but then also has touched venture lending a lot represent you on the company side as opposed to uh you know your general counsel assumingly you already have a corporate council and if you picked corporate council well they'll have good venture lending practice. Uh, but don't be shy about bringing them in relatively early. Usually at the term sheet phase to at least like give it a quick once over. You don't need to incur a bunch of, you know, cost at that point, but the okay, Peter, is what you have normal? Is there anything weird that's a glaring red flag? Is there anything you might consider uh particularly from the legal viewpoint, so not like the economics or deal structure, but you know, things that are going to be in the legal agreement that maybe don't show up in a term sheet, should we incorporate there? That's a place where you might want to have council involved pretty early. But making sure it's experienced outside council is something I'd encourage um encourage founders to do uh more so than anything else. Maybe the other thing I'd say that's a blanket statement

is to prepare yourself for the fact that unfortunately just like venture capital, you as the company will be paying for the pleasure of the other the lender and their lawyers work. — So what is that truly just a norm? It's a norm from my entire two decades in the industry. I imagine it mirrored just because the venture capital world started out that way. It mirrored that way. What I don't know why, but I can tell you from the company perspective, at least be prepared for that. Um, one two, uh, generally I would recommend sort of a legal cap being negotiated into an agreement — with the appropriate margin because you can't just say, I want to cap it arbitrarily low and a law firm for the lender is going to say, well, guys, we can't even do this for that level. So there's a margin there you can bake in but that can help control costs um that is sort of well worth doing. Occasionally you might be able to get a lender to pay for the cost of their legal documentation if you do sort of a form of documentation that doesn't involve a lot of negotiation that happens earlier on or perhaps if you agree to fund all of the debt at close like you know a lender will be more happy to — is there a equivalent of the NVCA docs but for venture debt? Not really. Sorry. No, not really is a too loose of a statement. Every lender has a template document that is going to vary based on its own peculiar the lender's history of good and bad situations. They will all cover a ton of the same stuff — and a lot of what we write about the book is broadly applicable to all those agreements but every lender has a sort of different form and format until you get to um syndicated transactions which is a pretty wellworn market not for venture debt but more for like big preipo lines of credit and other types of commercial financing there's sort of a um boilerplate commercial transaction document earlier than that almost all venture debt. It'll be sort of not truly bespoke. All a lot of the same topics and all be there, but it's not starting from the same — lot of different flavors of the kinds of things. Yeah. — And and for a particular company, given the amount of things that a lender will have restrictions around stuff like, you know, you got to make sure your uh IP is enforced. Uh if you move and have physical assets somewhere else that's new once we start a line, you have to tell us you can't move money out of the country without you. So all these things that for any given company there might be specific flexibility you need and you're going to need to negotiate lots of these things. Um which is where outside counsel can help you navigate that. But unfortunately there's not the oh we can use this standard template document that's going to speed up the process. — Y — uh in the way that you're asking. — Do you think that is um is there I mean one of the advantages that you outlined in the book of venture debt is the speed. Mhm. — Um, do you think that there's any world in which equity rounds become fast enough that the value of debt I know this is kind of a silly question because they impact different things, but like what if you took away that speed advantage from debt? Like does it lose a lot of the allure to you or is it is that really just a marginal thing — or marginal anything else? you know, venture debt both speed and, you know, time frame it's going to operate under is for most equity environments and mo most equity processes, it'll be shorter, but it's not like it's not 80% shorter. It's probably, — you know, I don't know, 70% the length of most venture capital processes. Obviously, in hot markets, venture capital processes go faster — earlier in a company's life cycle. you know, if you're raising a safe at your first, you know, seed round, that can go very fast because there's not a lot of things to diligence, frankly. — Um, so time frames though are going to typically be shorter from venture debt. The level of depth of diligence is going to be usually meaningfully different. Not that lenders don't want to dig into anything, but the level of diligence you're going to do as a lender is, you know, probably less than 50% of what a venture capital firm is going to do, assuming it's not the most hotly competitive deal on the planet that they're, you know, clamoring over themselves to compete on. Again, insert your thoughts on venture capital diligence, quality, — whole another hour, I think. Yeah. — Yeah. It's a whole different conversation. Equally interesting. Um but that I think the time thing is nice but to me the balance of for situations where it's appropriate to use venture debt having the combination of good venture capital investors a situation where you can put debt to work appropriately and a good partner like the time frame is if you can move quickly great but if you're a month later yeah — it can still be equally if not more impactful to the company and particularly the you founders existing shareholders employees you know, if you can minimize, you know, not have to take or avoid an extra 5 to 10% dilution like that can have meaningful outcomes. I think it's I mean I think it brings us back to a wonderful sort of closing macro which is in a world where companies are staying private for 14 15 16 years if every external funding round came with that you know chunk of dilution you are talking about really low IPO values for founder ownership or the employee pool just getting compressed and squeezed there. So I I mean

overall in your view one is venture debt used enough and two are is the macro changes that are happening across venture right now do they lend themselves towards more venture debt being used in the future? — I think it's hard to know is venture debt being used enough or too much. I think any given situation is going to vary. I think companies, boards, founders should be aware of it as a tool like I mentioned at the start of our — conversers you think understand venture debt. — Very few. — Right. Uh yeah. So, so is this a tool and education? — Yeah, education a tool. And then when and how should I apply it? And I would say as companies start to really ramp, you start to have things that are working is where I think venture deck can be the most impactful. And I'd say it's probably used a little bit less than it should. There might be being used a little bit more than it should earlier on in the company's life cycle. — Um because the most impactful part of it is when you can say, "Hey, listen. I need to go raise a growth equity round or something ahead of an IPO. " Um and unless I guess the valuation and these markets you never know the valuation's unbelievably high like great I can you know minimize dilution that way but setting and you guys have I'm sure seen it in your data uh for Carta but the there's pros and cons to setting your post money valuation at you know price for perfection heights versus if I could get a little further use venture debt at least as a balance to you know offset the equity I may have raised may need to raise like that can be hugely impactful and I think that um I think that's probably underused at the later stage of you know venture capital the current market we're in where you know at least for AI companies money's falling out of trees hitting people on the head — every day of the week — you know it's hard to venture debt funds have sort of scaled up to do you know multiundred million dollar rounds but if you're credibly raising you know billions of dollars of capital venture debt may be too much of a rounding error to make sense. So, I'm not sure venture debt should catch up because there is, you know, this is all debt that has to be repaid. So, you can get overleveraged. I have to be careful that wrote about in the book a couple of sort of things to think about in that vein. But the — um — you points there where taking an investment larger than the revenue, current revenues, latest funding round I believe was one of them. You know, there

was a number of red flags on the lender. — Yeah. I mean, there's certainly things you as a company should be trying to be careful of. If a lender is doing that, you're going to be more likely to get to a place where a lender is going to be uncomfortable very quickly. — Another rule of thumb is sort of if the debt service, whether that's just interest expense or principal and interest being paid, gets to something like a third or greater of opex is where historically every lender I've worked for found that was a place where a the lender didn't want to be, but b more importantly, companies would get into um more often than not situations where they didn't want to pay the debt back. The board started to hem and haw about it. Future investment got hampered because of the debt load without it being right- sized. So, there's a balance there you have to be careful with and that's where I think you have to be careful in hot markets. Just like venture capital, you can wildly um in this case overlever yourself and someone might be willing to do it, but that may not always be the best thing. So, in a current market environment like now, you have to just be cognizant of that overleverage. Do you think that the um the market that we're in right now where on the one side you have immense hype and like just every day you're kind of surprised at the giganticness of these numbers candidly on the other side you when I talk to GPS all the time they go yes Peter we obviously want our AI champion in the portfolio but we are internally worried that these dur these revenues aren't nearly as durable as they used to be. Is that a risk? Is that a new risk factor? You know, 10 years ago, if a company was growing 10x a year, you could be pretty sure that revenue is probably going to stick around. Now, I don't know that that's the case. And so, like, how do you judge venture dead in a world where the durability of the revenue has gone gotten a little bit more uh inconsistent. — Yeah. The use of sort of ARR or run rate. — Sure. We can do a whole another like how to define terms. It's just interesting. Yeah. that that's even those semantics are still used. Yeah. Even though I 100% agree that particular on the consumer side, but even the business side can you swap out to another either foundational model or different company who is building a specific use case in AI. I think a lot of lenders are paying attention to that and trying to do their best which is not something that they will have um been completely avoiding in the past. They've all they've always looked at durability of revenue, um repeatability of revenue, churn rates, all those things are going to play into uh a lender's comfort or lack thereof in lending a company money. And I think most lenders are through the hype cycle of the last 12 or 18 months and probably getting a little bit more pragmatic about or realistic I should say about okay, what do we think is real really repeatable recurring if at all sort of how are we modeling turn rates? like they're being smarter and um in the best cases trying to avoid because it's bad for a lender just as much as a company to overlever a business because you got to spend a bunch of time working through that. You have risk, you know, the potential for loss of principle. There's all these things that, you know, lenders want to avoid that too. So, I think the best lenders have gotten better at that. And you at the upper end of the market, you just have to be careful that you can't you can take on too much capital from debt or equity and not lead to a good outcome. — Yes. It turns out being overc capitalized is just as much a risk as

being under capitalized. — Yeah. Fundraising in general, equity or debt is not success, right? Is that just means you had to, you know, finance part of the business somehow. — Uh but if it's in service of, you know, getting to a good outcome or some meaningful milestones, I think it can be worth it. — I love it. Um Marshall, that was a that was an education. Thank you so much for stopping by, man. Thanks. — Awesome. Enjoyed the conversation. — Absolutely.