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Debt as Venture Capital

Darian M. Ibrahim

William & Mary Law School

June 12, 2009

University of Illinois Law Review, Vol. 2010, p. 1169, 2010
Univ. of Wisconsin Legal Studies Research Paper No. 1081

Venture debt, or loans to rapid-growth start-ups, is a puzzle. How are start-ups with no track records, positive cash flows, tangible collateral, or personal guarantees from entrepreneurs able to attract billions of dollars in loans each year? And why do start-ups take on debt rather than rely exclusively on equity investments from angel investors and venture capitalists (VCs), as well-known capital structure theories from corporate finance would seem to predict in this context? Using hand-collected interview data and theoretical contributions from finance, economics, and law, this Article solves the puzzle of venture debt by revealing that a start-up’s VC backing and intellectual property substitute for traditional loan repayment criteria and make venture debt attractive to a specialized set of lenders. On the firm side, venture debt helps entrepreneurs, angels, and VCs avoid dilution, improves VC internal rate of return, assists VCs in monitoring entrepreneurs, and follows from capital structure theories after the first round of VC funding.

Number of Pages in PDF File: 43

Keywords: venture debt, venture capital, capital structure, agency costs, monitoring, entrepreneurship, start-up

JEL Classification: G24, G32, K12, K22, M13

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Date posted: June 15, 2009 ; Last revised: October 7, 2010

Suggested Citation

Ibrahim, Darian M., Debt as Venture Capital (June 12, 2009). University of Illinois Law Review, Vol. 2010, p. 1169, 2010; Univ. of Wisconsin Legal Studies Research Paper No. 1081. Available at SSRN: https://ssrn.com/abstract=1418148 or http://dx.doi.org/10.2139/ssrn.1418148

Contact Information

Darian M. Ibrahim (Contact Author)
William & Mary Law School ( email )
South Henry Street
P.O. Box 8795
Williamsburg, VA 23187-8795
United States
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