As a company is searching for product market fit (PMF) early in its life, the environment will be incredibly fast moving and flexibility will be of the utmost importance. Engaging with capital markets providers that understand the flexibility needed and can create founder friendly solutions is imperative.
What Matters
Optimize for flexibility: try to aim for repayment terms that scale to the financial growth of your company. Your repayment conditions allow you to make higher payments to pay off the debt obligation more quickly as your business expands.
Optimize for minimal covenants: at this stage, having too many covenants on the term sheet could either restrict the growth of your business or cause conflicts between the founders and the creditors.
Find a lender who can be a partner: someone who can provide guidance and is open to working together. Time spent refining a capital markets strategy early on will pay dividends forever.
What to Avoid
Overly restrictive covenants: This does not have to mean zero covenants; some covenants are acceptable and allowing for minor covenants may be a good negotiating tactic to enable better cost of capital or a larger facility size.
Hidden fees: Exit fees, overly restrictive non-call protections for the lender and warrants are all topics to discuss carefully. A founder should expect that lenders may ask for small amounts of warrants.
Overly optimize for size on day 1: lenders often want a Company to prove out their business before they increase their facility size. If you can give the Lender that proof you may also be able to negotiate other changes to your advantage at a later date.
