Valuation divergence refers to the difference between the growth rate of a company’s valuation and the valuation of the shares that investors received. It can be due to a number of factors including: dilution by subsequent investors, and the exchange of a convertible note for equity. Valuation divergence is common in high growth companies and typically ranges from 3-5x.
Variable interest, also known as “floating interest” is a type of interest on a loan that fluctuates over time, due to its nature of being based on an underlying benchmark interest rate or index. Loans with a variable rate are like a double edged sword—they benefit from lower payments when the underlying interest rate market is in decline, but when rates rise the monthly payments spike.
For early-stage companies, when funds are tight, fixed interest loans or revenue based financing options are much more appropriate, because they limit the risk of defaulting.
Venture Capital (VC), not to be confused with Vulture Capital, is a form of private equity that seeks to fund the growth of early stage organizations. Venture capitalists typically also provide financial, legal, technical or managerial assistance, along with warm introductions to early customers and later stage investors when the company has demonstrated a high growth potential. VC funds typically consist of individual investors, investor groups, investment banks and other financial institutions.
Venture debt is a form of debt financing provided to venture-backed companies to fund working capital or capital expenses, such as purchasing equipment. It typically needs to be repaid within three to four years, and often starts out with a 6-12-month interest-only period. Venture debt products typically also come with personal guarantees, covenants, warrants, and other restrictive terms designed to benefit the financier. Some of the most common venture debt providers include: Silicon Valley Bank, and Hercules Capital.
For a more in-depth look at venture debt, check out the comprehensive guide we put together.