Debt can extend runway or quietly trap a company. Learn how experienced operators analyze debt structures, model true cost, and avoid common mistakes.
This piece is adapted from an Operators Guild Focus Session on Managing up, down, and sideways, featuring insights from seasoned operators in our community. Focus Sessions are small-group, member-only deep dives where operators pressure-test decisions, share lived experience, and get into the practical realities that don’t make it into blog posts or conference talks. If you want access to conversations like this — the recordings, the decks, and the community behind them — you can apply to join OG.
Analyzing debt structures is one of the hardest financial skills to build in a venture-backed company because the stakes are high, the market shifts quickly, and the real cost is rarely captured by the headline terms.
When debt works, it can extend runway without forcing a valuation, reduce dilution, and buy time to hit milestones on your own schedule. When it doesn’t, it quietly boxes the company in: covenants become a weekly stressor, refinancing becomes prohibitively expensive, lender relationships turn adversarial, and the “less dilutive” capital ends up costing far more than expected.
Most teams live in the messy middle. They know they want optionality, they know they want to avoid predatory structures, and they know they should “model the deal,” but they’re not always sure how to pressure-test debt terms with the same rigor they bring to equity.
Here’s a distilled look at how strong operators analyze debt structures: the core concepts that matter, the terms that trip teams up, and the practical modeling that turns a term sheet into a real decision.
Debt analysis needs a system, not a gut check
The fastest way to make a poor debt decision is to treat each term sheet like a one-off negotiation.
The best operators build a repeatable approach that lets them compare deals apples-to-apples, surface hidden cost, and see where risk actually lives. A good debt analysis system emphasizes:
- Structure over vibes, because debt terms are designed to look simple on the surface
- Fully loaded cost, not the interest rate alone
- Downside resilience, not just best-case runway extension
- Refinancing flexibility, because your company’s credit profile will change
Debt becomes manageable when you turn it into an analytical process instead of a story you hope works out.
The debt market is huge, and your options are not interchangeable
One reason venture teams get tripped up is that “debt” gets used as shorthand for one product. In reality, there are entirely different markets with different rules.
At a high level, operators tend to bucket structures into three broad zones:
Institutional debt (bonds and private placements)
Efficient and standardized, typically for larger companies, generally not customizable.
Non-bank lending (private credit, venture debt funds, tech-enabled lenders, equipment financing, and the rest)
Highly variable terms, wide range of pricing, more flexibility, and more potential for sharp edges.
Bank debt (commercial banks, venture banks, structured lending)
Lower cost of capital, stricter underwriting, and more emphasis on controls, covenants, and operating requirements.
Even within venture-backed lending, two deals can look similar and behave very differently. The point isn’t to memorize categories. The point is to stop assuming that “debt is debt,” because the structure you pick dictates how much freedom you’ll have later.
The two structural levers that shape almost everything
Most debt structures can be understood through two foundational dimensions: collateral and commitment.
Collateral: secured vs. unsecured
Every lender wants to know what happens if things go sideways.
- Secured means the lender has a claim on specific assets if you default. This typically requires formal steps to “perfect” that security interest.
- Unsecured often relies on restrictions that prevent you from pledging assets elsewhere, which can function similarly in practice depending on the terms.
For operators, the practical question is simple: what does this prevent us from doing later? Collateral isn’t just a legal detail. It affects future fundraising, future debt, and how much room you have if the business hits turbulence.
Commitment: committed vs. uncommitted
“Available capital” is not always actually available.
- Committed means the lender must fund when you draw, assuming you meet the deal conditions.
- Uncommitted means you can request money, but the lender can say no at the moment of draw — even if you’ve negotiated the documentation already.
This distinction matters most in periods where you’d want the capital the most.
The terms that look small but drive real cost and risk
Most teams focus on the interest rate and the facility size. Strong operators focus on the terms that determine whether the deal will still feel reasonable 18 months from now.
A few terms that deserve disproportionate attention:
Base rate and margin
The rate you pay is typically a market base rate plus a credit spread driven by your perceived risk. Two deals with similar “all-in rates” can still behave differently depending on how the spread resets and what triggers step-ups or step-downs.
Liquidity and financial covenants
Liquidity covenants are common in venture debt. They can become operationally exhausting if they’re tight, poorly defined, or mismatched to how your cash actually behaves month to month.
Conditions precedent to close vs. to draw
Many teams underestimate how many things need to be true to access funds. It’s worth mapping those conditions to internal owners early, because “standard” requirements can be hard to monitor in practice.
MAC clauses and broad default triggers
These clauses are often framed as boilerplate. The real question is how much discretion they give the lender during moments of ambiguity.
Banking requirements and control agreements
If the lender expects operating deposits or control, that’s part of the economics and part of the risk. Treat it as a real term, not a footnote.
Final payment and end-of-term fees
This is one of the most common sources of surprise cost. Some deals effectively charge you for exiting early, and the language can be subtle. A “prepayment allowed” clause can still hide a massive make-whole mechanic.
Debt becomes expensive when the exit is expensive.
The most common debt mistake is judging cost by the interest rate
One of the most useful shifts operators make is moving from “What’s the rate?” to “What’s the fully loaded cost of capital?”
Fees, end-of-term payments, and timing mechanics can drive the true cost well above what the interest rate suggests. If you want one number that forces clarity, model the deal’s cash flows and calculate an IRR.
This is where debt analysis becomes real. A term sheet stops being a set of promises and starts being a cost curve.
The modeling approach that tends to work best is straightforward:
- Model the draw period, because that determines whether the facility is usable
- Model the interest-only period, because that sets near-term cash burn impact
- Model the principal repayment period, because that affects runway later
- Layer in fees and end-of-term payments at the correct timing points
- Calculate XIRR on the full cash flow stream
Even better: ask the lender for their cash flow schedule too. It’s a fast way to confirm you’re interpreting the deal the same way they are, and it helps surface any “small” payment terms you may have missed.
Warrants are not an accessory; they are part of the price
If the deal includes warrant coverage, you should treat that equity value as part of what you’re paying.
A clean way to analyze warrants is to look at them in two timeframes:
- Value today, using current implied share price
- Value at a future price, because the cost grows as the company grows
The warrants may still be worth it. The point is to understand the trade: you’re exchanging future upside for current capital, and the size of that exchange can be easy to underweight if you only look at today’s number.
Banks vs. venture lenders: the trade is flexibility versus cost
A bank facility often comes with a lower cost of capital and the ability to bundle treasury or banking services. The trade is stricter requirements, tighter underwriting, and less flexibility on draw timing and structure.
Venture lenders tend to offer more flexibility and risk appetite. The trade is higher total cost — in fees, in warrants, and in terms that can become restrictive when you want to refinance.
There is no universal “best” option. What matters is matching the structure to the need.
A useful framing is to start with use of proceeds:
- If you need runway extension and optionality, you may prioritize flexibility
- If you need day-to-day working capital support, you may prioritize cost efficiency
- If the debt is being considered as a last resort because equity is unavailable, that’s a warning sign, not a strategy
Running the process matters as much as negotiating the terms
Debt markets are private and dynamic. There is no reliable public “rate sheet” for warrant coverage or covenant aggressiveness. If you want market truth, you need real term sheets.
A good process is focused, not exhausting:
- Talk to enough lenders to understand market reality
- Avoid running an unnecessarily massive beauty contest
- Use counsel early to sanity-check the term sheet against current norms
- Use investors and trusted CFO peers to validate what’s standard right now
- Pay attention to the relationship with the lender, because you may need them when things are not going well
Debt is a multi-year partnership. You’re choosing a counterparty, not just a price.
How to take it to your board in a way that drives a decision
Boards typically care about two things:
- What it costs the company
- What it costs them
The clearest way to support that conversation is a one-page comparison across options that shows:
- Commitment amount by lender
- Cash costs and timing
- Warrant economics
- Runway impact and the new cash-out date
- Any structural differences that affect flexibility
The goal is not to drown the board in terms. It’s to show the economics and the risk in a way that makes tradeoffs obvious.
The operating principles that keep debt from becoming a trap
A few takeaways consistently separate good debt decisions from painful ones:
- Everything is negotiable, but lenders still need to hit return targets, so focus on what matters most
- Your future credit profile will likely improve, so protect your ability to refinance
- Avoid over-borrowing because the facility looks exciting on paper
- Choose partners you trust in a downturn, not just when things are going well
- Don’t celebrate until the deal is closed and funded
The best debt decisions feel slightly boring. The cost is clear, the constraints are understood, and the company keeps its options.
That’s the point.
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