Understanding TERM SHEETs

Explore each venture debt term, understand the implications, and identify where structure, cost, and flexibility are driven within your facility.

MIGHTY TOOLS Understand what you’re signing

This tool breaks down each component of a typical venture debt term sheet and explains what it means in practice.

Expand each section to see plain language definitions, how different terms impact cost and flexibility, and where to focus your attention. You’ll also find practical tips on what to question, where terms are negotiable, and how to avoid common pitfalls.

For founders and CFOs, this is about reading beyond the headline rate. Structure, covenants, fees, and repayment profiles all matter.

This tool is intended for illustrative purposes only and does not constitute financial advice.

Annotated Term Sheet — Mighty Partners

Click any clause to see what it means in plain English and what to negotiate.

Negotiate Watch closely Standard

01Facility structure

Facility amountAUD $3,000,000 senior secured term loan, advanced in a single tranche on the Drawdown Date. Watch

What it means

You receive the full $3m in one hit on a single date. Simple and clean — no staged conditions attached to this version.

Watch for Milestone-gated tranches in other term sheets. If later tranches require "lender satisfaction" without defined metrics, that's discretionary power in the lender's hands. Push for objective, measurable milestones — e.g. "ARR exceeds $X by [date]".

PurposeGeneral working capital and growth initiatives of the Borrower, as approved by the Lender from time to time. Negotiate

What it means

You can use funds broadly for operations and growth. The "as approved" qualifier is the problem — it creates an ongoing approval gate.

Negotiation Push to remove "as approved by the Lender." Replace with a broad permitted purpose clause: "general corporate purposes, working capital and growth initiatives." You want flexibility without lender approval on every spend decision.

Term36 months from the Drawdown Date, comprising a 12-month Interest Only Period followed by 24 months of amortisation. Standard

What it means

You pay interest only for the first year — lower cash outflow while you deploy the capital. Principal repayments begin in month 13 on a straight-line amortisation schedule.

Model this carefully The step-up in monthly outflow at month 13 is significant. If your growth is back-loaded, negotiate a longer IO period — up to 18 months is achievable with strong metrics.

02Pricing

Interest rate15.00% per annum, calculated on the daily outstanding principal balance on an actual/365 basis, payable monthly in arrears. Negotiate

What it means

15% p.a. on whatever you currently owe, accruing daily, paid at month end. "Actual/365" means it accrues on the actual calendar — February costs less than December.

Watch for Confirm the calculation method. If the sheet says "calculated on the original principal" rather than the declining balance, the effective cost is meaningfully higher. Also check whether interest is simple or compound — it matters on longer terms.

Negotiation Rate is negotiable based on ARR quality, investor backing, and whether you're running a competitive process. If you have two term sheets, use them. A 1% reduction on $3m over 36 months saves approximately $45k in total interest.

Establishment fee2.00% of the Facility amount, payable on the Drawdown Date and deducted from the first advance. Negotiate

What it means

You receive $2,940,000 in cash — the $60,000 fee is deducted automatically from the first drawdown. Budget for this in your funding model.

Negotiation Establishment fees are sometimes negotiable, especially for repeat borrowers or strong deals. Higher fees are sometimes offered alongside a lower interest rate — always model the effective APR to compare, not just the headline rate.

Warrant coverageThe Borrower shall grant the Lender warrants to acquire ordinary shares equal to 1.00% of the Facility amount at the Last Round Price. Negotiate

What it means

The lender gets the right to purchase $30,000 worth of shares at your last funding round price. Typically exercised at exit or IPO when the gap between strike and actual price creates a return.

Watch for At a $30m valuation, 1% coverage equals ~0.1% dilution. At a $300m exit, that's worth ~$300k to the lender — modest for you but meaningful for them. Push for 0–0.5% coverage, ensure cashless (net-settlement) exercise mechanics, and set expiry at 5 years not 10. Some lenders have moved to fees-only — always ask.

03Covenants

Minimum ARRThe Borrower shall maintain Annualised Recurring Revenue of not less than $[X] at all times, tested monthly on the last Business Day of each calendar month. Negotiate

What it means

Your ARR must stay above a floor, tested monthly. A miss triggers a cure period — it's not immediate default. But repeated or uncured breach escalates.

The definition is everything Does it include services revenue? How is churn timing treated — on notice or on cancellation? Is it contracted value or recognised revenue? The threshold is secondary to the definition. Push for 20–30% headroom below your forecast case — not your upside case.

Minimum cashThe Borrower shall maintain unrestricted cash of not less than $500,000 at all times, tested monthly. Watch

What it means

You must always hold at least $500k in your bank account — unrestricted, available, excluding any restricted cash or security deposits.

High risk If your monthly burn is $400k, a $500k minimum cash covenant gives you roughly 5 weeks of buffer before breach. That is operationally very tight. Push for this to be expressed as months of OPEX — e.g. "2 months of trailing average OPEX" — so it scales with your business rather than becoming tighter as you grow.

Information obligationsMonthly management accounts within 20 Business Days of month end; quarterly board pack within 30 days; annual audited accounts within 120 days; prompt notice of any Material Adverse Change. Standard

What it means

You report monthly, quarterly, and annually. The "Material Adverse Change" obligation requires you to proactively flag anything significant — customer loss, revenue deterioration, litigation.

Practical note Largely non-negotiable and operationally fine if your finance processes are in place. The MAC notification clause is actually in your interest — it creates an obligation to communicate early, which is how you protect the lender relationship when things get difficult. Build the 20-day monthly accounts into your finance calendar from day one.

Change of controlThe Borrower shall not permit a Change of Control without the prior written consent of the Lender, such consent not to be unreasonably withheld or delayed. Negotiate

What it means

You cannot sell the company, merge, or transfer majority control without lender sign-off. "Not unreasonably withheld or delayed" is the safeguard — make sure it's in there.

Get the definition right Does a new funding round trigger it if existing investors are diluted below 50%? Does a founder buyout? Does a secondary transaction? Vague definitions create uncertainty at exactly the wrong moment — when you're trying to close a deal quickly.

04Security

SecurityFirst-ranking General Security Agreement (GSA) over all present and after-acquired property of the Borrower and each Guarantor, registered on the PPSR. Standard

What it means

The lender takes a charge over everything the company owns or will own — IP, receivables, equipment, bank accounts. Registered on the PPSR, publicly searchable. If you default, they can enforce against these assets.

Practical note Standard for senior secured venture debt. Ensure all entities that hold material assets (IP holding companies, subsidiaries) are captured in the security package. Check that security assignment doesn't breach customer contracts that restrict IP assignment — common in enterprise SaaS agreements.

Personal guaranteeThe obligations of the Borrower shall be personally guaranteed by [Founder Name], limited to the lesser of the outstanding balance or $1,000,000. Negotiate

What it means

If the company can't pay, you are personally on the hook for up to $1m. This survives company failure and puts your personal assets at risk.

Push back hard Most specialist growth credit lenders do not require personal guarantees for institutionally-backed companies with strong assets. If the lender insists: negotiate a cap (already present here), a time limit (falls away after 12–18 months of no covenant breach), and a mechanism for release on exit or refinancing. This is one of the most important terms in the document — don't let it slip through.

This tool is educational and does not constitute legal or financial advice. Always seek independent legal advice before signing a term sheet. © Mighty Partners 2026.