Your cluster is cheaper capital than your next round
A lender will fund hardware you were about to buy with equity. The equipment keeps working. The cap table does not move.
Most venture debt has an all-asset lien. The equipment gets carved out.
A blanket lien covers everything the company owns, including the cluster. For an equipment lender to take first position on the cluster, the venture lender agrees to step back on that one class of asset. This is routine. It is done in two documents.
The carve-out
A short amendment to the venture loan that excludes the scheduled equipment, by serial, from the venture lender's collateral. Purchase money and equipment financing carve-outs are usually already permitted in the loan, up to a cap.
The intercreditor agreement
An agreement between the two lenders. It says who has first claim on what, who gets notice of a default, and who can enforce. The equipment lender is first on the equipment and nothing else. The venture lender is first on everything else.
What we do
We draft the serial schedule, send the carve-out request to your venture lender, and sit on the call. Most venture lenders have a form for this.
How much dilution does this save, in practice?
The facility divided by your post-money. The appraisal report gives you an indicative range and the lender sets the final amount, so you can run the number yourself.
Should I do this before or after the round?
Before, if the equipment is already owned or about to be bought. The cluster earns, and you raise later at a higher price. After works too. The loan does not block a round, and some boards prefer to see the debt in place before pricing.
How does it look on the cap table?
It does not appear on the cap table. Warrants, if any, are set by the lender in the term sheet. It appears on the balance sheet as secured debt with the equipment as collateral, and in the data room as the loan agreement, security agreement and serial schedule.
Is there a material adverse change clause?
The covenants are on the equipment: utilisation, location, insurance, firmware. They are measured from telemetry, so there is no judgement call about the business. Whether a lender adds a MAC clause is set in the term sheet, and we negotiate it with you. We ask network lenders to rely on the collateral, not on a MAC.
Can I pay it off at the round?
Prepayment terms are set by the lender in the term sheet. You can also keep it running if the rate is cheaper than the equity you would use to clear it.