Young tech companies are more familiar with equity fundraising than debt financing. Unlike equity where your investor is your shareholder and partner for the entire lifetime of the company, debt transactions include an agreed end-date to the relationship, also called Maturity Date. The Maturity Date is when your company needs to payback all its debt and other obligations to the lender and the financing contract ends. The Maturity Date is fixed to a specific date in the future, it can be 6 months from now, 5 years from now or to any other period which you agree with the lender in advance.

The ability to control the situation is hidden in the "early repayment clause", and this is why its fine terms are so important to understand and negotiate.

Let's take the following case study:
On 1.1.22 KushKush AI Inc, a US startup company with annual sales of $2MM, (net) burn-rate of $70k per month and 6 months of runway entered a debt financing deal for 4 years (Maturity Date: 1.1.26) with OrigiLender Fund. Due to the fairly high risk of that company (cash-burning and short runway) the terms of such debt financing deal were less favorable for KushKush – high interest rate, high fees, many restrictions and financial covenants.

Jumping forward 2 years in time, KushKush business is improved: its annual sales grew to $5MM and it does not burn cash any longer but it has turned to profitability. It’s fundability situation improved much and both equity investors and debt investors offer KushKush now great new deals. Lender ReFi offers KushKush 3X larger loan for significantly lower interest rate and with fewer restrictions and covenants than before. Equity investor CleanBS VC offers to invest equity in KushKush for very high valuation but requires that KushKush immediately paybacks its outstanding expensive debt provided by OrigiLender Fund.

Now KushKush opens the debt contract it signed on 1.1.22 with OrigiLender Fund and sees:

Scenario A: it did not include any early repayment option – KushKush cannot enjoy its new financial status of high growth and profitability. KushKush cannot close a deal neither with Lender Refi nor with Clean BS VC, the equity investor.

Scenario B: it includes an early repayment option but the early repayment fee is very high – KushKush can theoretically enjoy its improved financial status, but it will have to pay high fees to OrigiLender Fund if it wants to accept Lender Refi offer or Clean BS VC offer. Perhaps that high early repayment fee makes the whole new investment less attractive, as most of the benefit of doing so will go to OrigiLender Fund as a fee, rather than to KushKush.

Scenario C: it includes an early repayment option with low early repayment – KushKush can fully control its destiny – it can choose to accept the offers from Lender Refi or Clean BS VC, or it can also negotiate new terms with OrigiLender Fund. A good early repayment clause gives a strong negotiation power to KushKush which means that only KushKush will benefit from the situation

Dealing with debt and Maturity Date, the only way to control your situation is to negotiate good early repayment terms in advance.

Butterfi – Control Your Destiny

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