How to Read a Venture Debt Term Sheet: Warrants and Covenants

Warrant coverage is the right to buy company shares at a fixed price, granted to the lender alongside the loan. It is quoted as a percentage of the loan amount, and the number of shares comes from dividing that dollar value by the strike price.

Say you borrow $5,000,000 with 8% warrant coverage and a strike price of $2.00, the price of your last preferred round. For example, coverage equals $400,000, which divided by $2.00 gives 200,000 shares. Treat the coverage dollar amount as a sizing figure used to count shares, not as the value of the warrant. If you have 40,000,000 fully diluted shares, the lender ends up holding about 0.5% of the company.

That is small next to an equity round, which is the point of the product. The details that change the value are the strike price (last round or next round, whichever is lower), how long the warrant lasts, and whether the lender can exercise without paying cash. Ask for all three in writing. The exercise mechanics are covered in cashless exercise provisions, and the dilution comparison against notes is in warrants versus convertible notes.

Venture loans often float over the bank prime rate, which stood at 6.75 percent in mid-2026¹, plus a spread the lender sets. The rate is only one line of the cost. Read these together:

• Interest-only period: you pay interest but no principal, which lowers early payments but leaves the same principal to repay in a shorter window afterward.
• Final payment: a fee, quoted as a percentage of the original principal, due when the loan is repaid or prepaid. It is often called a success fee or end-of-term payment, and it is easy to miss because it is not interest.
• Origination or commitment fee: charged when the loan is signed or when an unused commitment is reserved.
• Prepayment terms: the fee to repay early, which matters if you raise a big round and want out.

Here is how the cash costs stack. Suppose the rate is 10% on $5,000,000 with a 12-month interest-only period, a 4% final payment and a 1% origination fee, alongside the warrant above: year-one interest comes to $500,000, the final payment to $200,000 and the origination fee to $50,000, so fees add $250,000 on top of interest, or 5% of the amount borrowed.

The warrant belongs in a separate column. Its economic value depends on the strike price, the term and what your company is worth when it is exercised, so estimate it on its own and compare it as dilution (0.5% in this example) next to the cash costs. Sum only true cash costs, meaning interest, fees and the final payment, when you calculate an all-in rate. Run the same math on every term sheet you receive. The success fee guide covers how final payments are structured.

Covenants are promises you make to keep the loan in good standing. They fall into groups, and the groups differ in how likely they are to bite:

• Financial covenants: a minimum cash balance, a minimum revenue or ARR level, or a liquidity ratio tested monthly or quarterly. These are the ones that trip when growth stalls.
• Reporting covenants: monthly financials, an annual budget and board materials delivered on a schedule. Missing a deadline can be a technical default, so put the dates on your calendar. The reporting requirements guide goes deeper.
• Negative covenants: limits on other debt, liens, dividends, acquisitions and asset transfers. These matter when you want to add a second facility.
• Material adverse change clause: lets the lender call default when it judges your prospects have worsened. Try to narrow the wording or remove it.
• Main-account requirement: some lenders want your operating cash held with them or an affiliate.

Prefer covenants that measure something you control, ask for a cure period of some length before a breach becomes an event of default, and set any revenue floor well under your plan rather than at it.

Venture debt trades cash payments and a small ownership stake for a longer runway, so it fits when the extra months get you to a specific milestone that raises your next valuation. It fits poorly when your burn is unpredictable, because a fixed repayment schedule does not flex.

Lenders will look at your growth and your ability to raise again or reach breakeven, so ask what growth level the covenants assume and model a case where you fall short, including a next round that slips by a couple of quarters.

Two questions settle most cases. First, what would you do with the runway, and does that change your next round's price? Second, if the next round takes six months longer than planned, do you still meet the covenants? If either answer is uncertain, model a downside case before signing.

Work through these in order, because early items give you bargaining room on later ones:

1. Get at least two term sheets so the warrant coverage, final payment and rate can be compared side by side.
2. Convert every cash cost into dollars and an all-in annual percentage, and express each warrant as percent dilution, so offers are comparable.
3. Negotiate the strike price and warrant term, and confirm cashless exercise.
4. Ask for the covenants in a schedule with the exact definitions of cash, revenue and the test dates.
5. Check what collateral the lender takes. A blanket lien that includes your intellectual property can limit later financing, so ask whether a negative pledge on IP is available instead.
6. Confirm prepayment fees and who pays each side's legal costs.

Have your counsel review the final documents. A useful next step is the venture debt due diligence checklist, and if you are comparing fintech lenders, see a comparison of fintech financing providers.