This plain-English guide explains a venture debt term sheet: what each section means, which parts are typically standard, and where we can tailor around your plan. Our goal is simple: flexible growth capital that extends runway while preserving equity.
A term sheet is a non-binding summary of the deal that outlines funding amount, pricing, structure, security, covenants, reporting, and may offer insight into closing steps. It’s the blueprint your legal documents will follow, so clarity here prevents surprises later. Industry guidance consistently notes that aligning on the big points at the term-sheet stage makes the definitive documents far faster and smoother.
Loan amount is sized to your plan and recent round. Some lenders (particularly bank lenders) will require concurrent equity and size relative to that round. At Flow Capital, we typically do not require equity co-investments and instead will size relative to your plan and major milestones.
The intent is acceleration: GTM, key hires, geographic expansion, selective M&A, or bridging to the next valuation step with minimal dilution. Experienced venture counsel and lender primers position the term sheet as the moment to confirm those objectives and ensure the structure maps to the plan. (Cooley GO)
Almost all growth-stage facilities ask for both interest and scheduled amortizing repayments. Some may start with an interest-only period and stage amortization sometime after the draw (12 or 18 months later). Lenders may also offer a partial PIK (paid-in-kind) option, where a portion of interest accrues. These levers exist to support growth, not strain runway. (Goodwin Law Firm)
Expect standard closing/origination fees, third-party legal costs, and a prepayment fee if you retire the loan early. There is an implicit commitment a borrower makes to a lender, where the borrower, as set out in its plan, will deploy capital toward growth-enhancing purposes for some period of time to see through its investment cycle.
Many term sheets will step down the prepayment fees the longer a loan remains outstanding. The prepay grid protects the economics of the facility while keeping flexibility if you refinance or exit. You’ll see similar constructs across reputable guides and analyzed term sheets.
Often lenders include a modest warrant, which is a small right to purchase shares later. Coverage is frequently expressed as a percentage of the loan commitment (e.g., 10-30% of a loan facility); many lenders reference last-round preferred stock for the warrant class.
Objective: align long-term upside with a small, transparent cap-table impact. YC’s and law-firm explainers adopt this framing, and lender resources show how coverage varies with risk and deal profile. (Y Combinator, Cooley GO)
You should expect core operating covenants that preserve collateral value (limits on new senior debt/priming liens, major asset or IP transfers, and change-of-control without consent). These guardrails are standard and mandatory in secured venture facilities. There will generally be a couple of simple financial covenants, such as a liquidity test or other tests tied to monthly financial performance. These financial covenants act as guardrails and help both sides stay ahead of operating issues that may manifest. Lenders will aim to map financial covenants to the underwriting forecast,making it critical that you present your lenders with realistic and attainable forecasts. You should be wary of fixed exit payments (such as put options) that are not tied to company performance and do not properly align interests between lender and borrower.
Venture debt is typically secured. In the U.S., lenders perfect their security interest by filing a UCC-1 financing statement, which is a public notice that helps establish priority among creditors; filings are typically made with the state Secretary of State. In Canada, lenders generally take a General Security Agreement (GSA) and register under provincial PPSA systems. In the UK, the lender registered a charge on the company at Companies House. Security over land may also be registered at the HL Land Registry. (Legal Information Institute, Department of State, McMillan LLP, GOV.UK Assets).
You should be provided a checklist: KYC, board approvals, cap table, insurance endorsements, and any landlord or inter creditor items. Non-bank processes are typically faster than traditional bank workflows; especially if your data room is organized and counsel is familiar with venture debt. Practitioner checklists and lender explainers mirror this flow. (Law Society of British Columbia).
Standard terms exist to make the loan work predictably for both sides:
Tailored levers are where lenders can shape the deal around your plan:
Founders who benefit most tend to have:
The term sheet should reflect that reality so the loan supports but does not constrain execution. Agreeing the right economics and structure early keeps you focused on building, not paper.
Smooth closes share a pattern:
1. Is a term sheet binding?
Most business terms are non-binding; confidentiality/exclusivity can bind. The final documents largely mirror what’s agreed here.
2. Why are UCC-1/PPSA filings necessary?
They perfect the lender’s security interest and establish priority, which are standard steps in secured lending (U.S. Article 9; Canadian PPSA).
3. What’s “standard” on prepayment?
An early payoff fee which can step down the longer a loan remains outstanding. Exact grids vary by lender and timing.
4. What makes non-bank venture debt “startup-friendly”?
Speed, flexibility, and a structure designed around venture-backed growth: interest-only structures and tailored covenants.
5. What should I have ready before signing?
Monthly financials/KPIs, forecast with sensitivities, sales pipelines, cap table/board approvals, insurance, key contracts, and IP/filing summaries.
6. How fast can we close?
With documents and diligence ready, non-bank venture debt typically moves quickly (4 to 6 weeks) compared to traditional bank processes; the term sheet stages the final papers and filings.
