Venture debt in the German market — differentiation from the legal institution of shareholder loans and equivalent third-party loans

Venture debt, i.e. risk loans, is still a rela­tively new and inno­va­tive finan­cing instru­ment in the German venture capi­tal and start-up scene. In fact, this is a form of debt finan­cing — origi­na­ting in the Anglo-Ameri­­can region — which is gran­ted to suita­ble growth compa­nies by specia­li­zed provi­ders, usually private debt funds. In the current diffi­cult market envi­ron­ment for equity rounds, venture debt can play an even grea­ter role in finan­cing inno­va­tions in the future than it has to date. When draf­ting the contrac­tual docu­men­ta­tion for German deals, care must be taken to ensure that venture loans are suffi­ci­ently clearly distin­gu­is­hed from the legal insti­tu­tion of the share­hol­der loan and, in parti­cu­lar, from so-called equi­va­lent third-party loans.

Venture loans are gene­rally not a stand-alone finan­cing solu­tion, but a finan­cing instru­ment that is used to comple­ment equity finan­cing rounds. Venture loans are often taken out between two finan­cing rounds in order to finance the company’s further deve­lo­p­ment until the next valua­­tion-rele­­vant mile­stone is reached. Another exam­ple of the use of venture debt is the bridge finan­cing of later-stage start-ups until a plan­ned IPO or exit, without (further) diluting exis­ting inves­tors on the way there.