Dear SaaStr: We’re at $4M ARR, growing well, and a lender is offering us $3M in venture debt. Our investors think it’s “non-dilutive capital.” Should we take it?
Short answer: Maybe. But understand what you’re signing before you do. Because “non-dilutive” is one of the most dangerous half-truths in startup finance.
Let me tell you a story.
A Billion-Dollar Exit. Zero for the Founders.
Divvy Homes sold to Brookfield Properties in early 2025 for approximately $1 billion.
The founders got $0. The employees got $0. Many of the venture investors got $0.
A $2.3 billion company at its peak. Backed by a16z and Tiger Global. Sold for a billion dollars. And the people who built it walked away with nothing.
This wasn’t a failure story. It was a capital structure story. Specifically, a debt story.
Here’s what happened: Divvy raised over $400 million in venture equity, which came with its own liquidation preferences. Then in October 2021, they layered on approximately $735 million in debt financing. Total capital raised: over $1.2 billion. Exit price: $1 billion.
Simple math. Brutal outcome.
Debt sits at the top of every waterfall. It gets paid first, in full, before any equity — preferred or common — sees a dollar. When you stack $735 million in debt against a $1 billion exit, there’s nothing left. Not for VCs. Not for employees. Not for the founder who spent a decade of her life building it.
Adena Hefets built something real. Divvy helped 2,000 families become homeowners across 20 cities. She built a legitimate business. But building something real and building something that rewards the builders are two very different things. The gap between them is called a capital structure.
But Wait — Isn’t This a Capital-Intensive Business Edge Case?
Yes and no.
Divvy was an extreme case because they were buying physical homes. Their debt wasn’t operational — it was the product. That’s a specific trap most B2B founders won’t fall into.
But the underlying lesson absolutely applies to you.
Every time you take on debt — venture debt, revenue-based financing, a warehouse line — you are moving capital to the top of your waterfall. Above your preferred shareholders. Above yourself. Above every employee who ever took a below-market salary for options they assumed were worth something.
At $3M in debt, this probably doesn’t matter much. You can pay it back from operations if things go sideways.
But founders don’t take $3M once. They take $3M, then $7M, then $15M. Each tranche feels fine at the time. The business is growing. The investors are supportive. The lender is friendly.
And then the market turns, or the exit is lower than expected, or the timeline extends, and suddenly that “non-dilutive capital” is the thing standing between you and any outcome for your equity.
The Specific Traps to Watch
1. Warrants are dilution. Full stop.
Most venture debt comes with warrants — the right to purchase equity at a set price. Your lender will frame this as a small cost. Sometimes it is. But warrants are dilution, and they’re dilution that comes with a debt obligation on top. You’re paying twice.
2. Covenants restrict your options at exactly the wrong time.
Venture debt often comes with revenue covenants, minimum cash covenants, or change-of-control provisions. These tend to bite hardest when you’re negotiating an exit or a down round — precisely the moments when you need maximum flexibility and have the least leverage.
3. The maturity date creates a crisis if your timing is off.
Most venture debt matures in 24-36 months. If your fundraise slips, your growth stalls, or your planned exit doesn’t happen on schedule, you hit that maturity date in a bad position. Now you’re either raising equity at a bad time, renegotiating with a lender who has all the leverage, or selling under duress.
4. It gets counted as “cash position” — until it’s a liability.
I’ve seen this specific error kill otherwise strong board meetings. A startup shows $8M in cash, and it feels strong. But $5M of that is venture debt that matures in 18 months. The lender is already in the room. That’s not the same $8M. Your CFO or VP Finance may be technically accurate in reporting it as cash while the reality of what happens in 18 months isn’t front-and-center in anyone’s mind.
When Venture Debt Actually Makes Sense
I’m not saying never do it. Done right, venture debt is a legitimate tool. Here’s when it works:
Take it right after a strong equity round. The best time to add venture debt is immediately post-Series A or Series B when you have months of runway, strong metrics, and don’t need the capital. You’re adding optionality, not plugging a hole.
Use it to extend runway toward a clear milestone. “We need 6 more months to hit $X ARR, which changes our Series B valuation meaningfully” is a real use case. “We’re not sure what’s going wrong and need time to figure it out” is not.
Make sure the math works at multiple exit scenarios. Before you sign, build the waterfall at 0.5x, 1x, and 2x of total capital raised. If you get $0 in two of those three scenarios, reconsider.
Borrow an amount you can repay from operations. If something goes wrong with the business and you can’t raise equity, can you pay back this debt from revenue? If the answer is no, you’re taking on more risk than you probably realize.
The Bigger Point
Here’s what I’ve learned investing in hundreds of B2B companies: founders understand their product deeply, their market reasonably, and their capital structure almost not at all.
That’s not a criticism. Nobody teaches this. The lender is friendly. The investors are supportive. Everyone frames debt as a straightforward tool. And mostly, it is.
Until it isn’t.
The best time to understand your waterfall is before you sign the term sheet. The second best time is right now. Pull up your cap table. Add in your debt. Model out what you get at $20M, $50M, $100M, $200M exits. If the number you see at the most likely exit scenario for your company is zero — or close to it — that’s information you need to have.
Divvy built something real. The outcomes were wrong because the structure was wrong. Don’t let that happen to you.
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