Venture Debt in Dutch Startup and Scale-Up Financing

Venture debt can extend runway without an immediate equity round, but the real trade-off is dilution versus repayment risk and lender control.

Venture debt can be attractive for a Dutch startup or scale-up that has raised equity but needs additional capital before its next financing round. The company avoids issuing a large block of new shares immediately, while the lender receives interest, repayment rights, covenants and sometimes warrants.

That can look less dilutive than another equity round. It is not free capital.

Debt has to be repaid. Covenants can limit financial and operational flexibility. Security may affect future financing, and an equity kicker can still create dilution. For international investors assessing a Dutch company, venture debt should therefore be reviewed together with the equity capital structure and the next expected funding round.

This article forms part of the wider Dutch Venture Capital Insights on Dutch BV financing and investor rights. For a more lender-focused analysis of security, consents and governance controls, see Venture Debt for Dutch BVs.

When venture debt works

Venture debt tends to make most sense where additional capital can take the company to a recognisable next milestone without requiring a full equity repricing.

The company may use it to extend runway after an equity round, finance working capital, support growth or postpone the next equity raise until stronger financial or commercial metrics have been reached.

The attraction for founders is obvious: raising EUR 2 million of debt does not immediately dilute the shareholders in the same way as issuing EUR 2 million of new equity.

Whether that is economically better depends on what happens next.

If the company reaches its milestones and raises its next round at a stronger valuation, the debt may have been effective. If growth is delayed and cash remains tight, repayment obligations can make the next financing more difficult.

I would therefore look first at the repayment case, not at the headline absence of dilution.

The broader financing context is discussed in Raising Venture Capital in a Dutch BV.

The financing terms matter more than the label

Venture debt can be structured in different ways. A facility may provide one amount at closing or several drawdowns. Interest may be paid in cash, capitalised or combined with other fees. Repayment may amortise during the term or become due largely at maturity.

Those terms determine the real runway.

A company that receives additional cash today but starts substantial amortisation before the next expected equity round may have solved only part of its funding problem.

Maturity should also leave enough room for the company to execute its financing plan if the next round takes longer than expected. Equity rounds rarely close on the exact date assumed in the financial model.

Existing financing also matters. A Dutch startup may already have shareholder loans, convertible loans or other instruments outstanding. Their ranking, repayment position and conversion mechanics should be understood before another layer of debt is added.

Warrants reduce the apparent dilution advantage

Venture lenders sometimes receive warrants or another equity kicker in addition to interest and repayment.

That does not make the financing unattractive, but the economics should be transparent.

The warrant should be included in the fully diluted cap table. The company should know what share class can be acquired, at which exercise price and what happens on a future financing or exit.

A small equity kicker may be a reasonable price for debt that allows the company to reach a materially higher valuation before raising equity again.

A large warrant package combined with substantial interest, fees and lender protections may produce a different conclusion.

For investors considering a later equity round, outstanding warrants form part of the capitalization they inherit. They should not first appear when the lender decides to exercise.

This is why venture debt should be reviewed together with the company’s broader cap table.

Covenants can affect how the company is run

Venture debt usually comes with contractual restrictions that an equity investor does not need in the same form.

The lender may require financial reporting, minimum liquidity, restrictions on additional debt, limitations on distributions and controls over disposals or other material transactions.

Some of these protections are straightforward. Others can overlap with reserved matters already granted to VC investors under the shareholders’ agreement.

That overlap deserves attention.

A company should avoid creating two consent structures that do not work together: one for its shareholders and one for its lender. A future financing, acquisition or restructuring may otherwise require approvals from several parties under different documents.

This is particularly relevant where the existing shareholders already have extensive investor veto rights and reserved matters.

For a Dutch BV, lender controls must also sit alongside the statutory role of the management board. Contractual restrictions can protect a lender, but they do not replace the board’s own decision-making responsibilities.

Security affects the next financing

Security can materially change the company’s financing flexibility.

Depending on the transaction, a lender may seek security over shares, bank accounts, receivables, IP or other assets. The scope depends on the company, its group structure and the credit.

An incoming equity investor should understand that package. So should any future lender.

If the company later wants additional debt, the existing lender may have a negative pledge or consent right. If another lender also requires security, ranking and intercreditor arrangements may be needed.

The same applies where existing shareholder loans or convertible instruments are already outstanding. Their repayment or subordination position should be understood before venture debt is added.

The Dutch-law mechanics of security, corporate authority and lender consents are discussed in more detail in Venture Debt for Dutch BVs.

Venture debt should be modelled into the next equity round

A venture debt facility does not sit outside the VC story. It changes it.

The next equity investor will look at the amount outstanding, accrued interest, maturity, amortisation, security, covenant headroom, warrants and any change-of-control or repayment premium.

If part of the new equity financing has to be used immediately to repay the debt, that affects the amount of growth capital actually reaching the business.

The same is true on an exit. The debt is normally repaid ahead of distributions to shareholders, while warrants may also participate in the equity value.

That is why I would model venture debt both as debt and as part of the company’s future capitalization.

The comparison is not simply “debt means no dilution”. The relevant comparison is the total cost and flexibility of the debt against the dilution and governance impact of raising more equity today.

Where the company is already approaching a difficult follow-on round, the interaction with down-round and anti-dilution protection should also be reviewed.

Dutch BV implementation

Before signing the facility, the company should check its existing corporate documentation.

The shareholders’ agreement may require investor consent for new indebtedness, security, guarantees or material financing arrangements. The articles and board rules may contain additional approval requirements.

The relevant Dutch security documents also need to be put in place correctly. Where shares in a Dutch BV are pledged, Dutch notarial involvement is generally required.

Warrants or other rights to acquire future shares create a separate equity implementation workstream. The promised future shares must fit the articles, shareholder rights, corporate approvals and eventual notarial issuance mechanics.

These are usually manageable points. They become more difficult if they are considered only after the commercial financing terms have already been fixed.

For international investors and founders, this is part of the wider Dutch venture capital workstream: the debt package has to fit the existing shareholder arrangements and leave room for the next financing round.

Practical conclusion

Venture debt can be a useful part of the capital stack of a Dutch startup or scale-up. It can extend runway and delay an equity raise at a point where issuing shares would be expensive.

Its value depends on the company being able to carry the debt.

Repayment, maturity, covenants, security and warrants should therefore be reviewed against the same financial plan that supports the next equity round.

For foreign VC investors and founders, the Dutch legal workstream is to make sure the debt package works with existing shareholder rights, the cap table and future financing flexibility.

If those pieces do not align, the company may have reduced dilution today at the expense of a more difficult round tomorrow.

FAQ

Does venture debt avoid dilution?

It avoids the immediate dilution of a normal equity financing, but warrants or other equity kickers can still dilute shareholders.

When is venture debt most useful?

Typically where additional capital can extend runway to a defined milestone or future financing and the company has a credible route to repayment or refinancing.

Can existing VC investors block venture debt?

Potentially. The shareholders’ agreement or other corporate documents may require investor consent for material debt, security or guarantees.

Does Dutch venture debt usually involve security?

It may. The security package depends on the lender, company and transaction. Security and related consent rights should also be reviewed for their effect on future financing.

What should a new equity investor review?

The outstanding principal, interest, maturity, repayment schedule, security, covenants, warrants, consent rights and any amounts that must be repaid from the new financing.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises international investors, founders and growth companies on Dutch VC and growth financing, venture debt, warrants, convertible instruments and Dutch BV implementation.

Considering venture debt for a Dutch startup or scale-up?

Venture debt should be assessed together with the existing equity structure and the next expected financing round.

Dirk advises on the Dutch corporate-law workstream, including financing terms, investor consents, warrant and cap table impact, corporate approvals and coordination of Dutch implementation.

Contact Dirk at dirk.dewaard@viottalaw.com to discuss venture debt or other growth financing involving a Dutch BV.