The venture debt landscape is evolving. For years, warrant coverage has been a standard component of venture debt deals—giving lenders the right to purchase equity at a preset price. But a growing number of lenders, especially in Europe, are shifting toward pure interest models that eliminate or minimize warrant requirements.
This trend is reshaping how founders think about non-dilutive capital. Understanding why this shift is happening—and what it means for your fundraising strategy—can help you negotiate better terms and preserve more equity.
Understanding Warrants in Venture Debt
What Are Warrants?
Warrants give lenders the option (but not the obligation) to purchase equity at a predetermined price, typically the valuation of your last fundraising round.
Example: If you raise €2M in venture debt with 5% warrant coverage at a €20M valuation, the lender gets warrants worth €100K (5% of €2M) that can be exercised to purchase equity at the €20M valuation price.
Traditional Structure
- • Interest rate: 8-12%
- • Warrant coverage: 5-15% of loan
- • Total cost of capital: ~10-15%
Pure Interest Structure
- • Interest rate: 12-18%
- • Warrant coverage: 0-2%
- • Total cost of capital: ~12-18%
Why Lenders Are Moving Away from Warrants
1. Higher Interest Rates = Better Returns Without Warrants
In the low-rate environment of 2010-2021, lenders needed warrants to achieve target returns. With interest rates rising to 4-5% baseline, lenders can now price debt at 12-15% and achieve attractive returns purely through interest, without the complexity of equity upside.
2. Founder Demand for Simplicity
Founders increasingly prefer straightforward pricing. Pure interest models are easier to understand, model in financial plans, and explain to boards. The predictability reduces friction and speeds up deal closings.
3. Regulatory and Accounting Complexity
Warrants create accounting complexity (fair value calculations, balance sheet treatment) and potential tax implications. Pure interest structures simplify compliance, audit processes, and cap table management.
4. Competitive Differentiation
As the venture debt market becomes more competitive, especially in Europe, lenders are differentiating themselves by offering warrant-free structures. This attracts founders who value equity preservation above all else.
5. Shorter Time Horizons
Many new venture debt facilities have shorter terms (18-36 months vs. 48+ months). With shorter duration, lenders focus on reliable interest income rather than speculative equity appreciation years into the future.
Comparing Warrant-Based vs. Pure Interest Models
Warrant-Based Model
Advantages:
- ✓ Lower stated interest rate
- ✓ Aligns lender success with company success
- ✓ May defer some cost to exit event
Disadvantages:
- ⚠ Equity dilution (typically 0.2-1.5%)
- ⚠ Complex cap table management
- ⚠ Accounting complexity
- ⚠ Potential exit complications
Pure Interest Model
Advantages:
- ✓ Zero or minimal equity dilution
- ✓ Simpler cap table
- ✓ Predictable cost structure
- ✓ Easier accounting treatment
Disadvantages:
- ⚠ Higher stated interest rate
- ⚠ Higher cash burden during term
- ⚠ Full cost paid regardless of success
Which Model Is Right for You?
Consider Pure Interest If:
- →You're highly confident in achieving a high-value exit and want to preserve every basis point of equity
- →Your cap table is already complex and you want to avoid warrant complications
- →You have strong cash generation and can handle higher interest payments
- →You prefer transparent, predictable financing costs
Consider Warrant-Based If:
- →Lower monthly cash outflows are critical for your runway management
- →You're comfortable with minor dilution (0.2-1%) in exchange for lower rates
- →You value alignment between lender and company success
- →Your accounting team can handle the complexity
Real Deal Comparison: Warrant vs. Pure Interest
Actual venture debt structures from recent European deals illustrate the practical differences between warrant-based and pure interest models.
| Deal Component | Warrant-Based (2021) | Pure Interest (2024) |
|---|---|---|
| Loan Amount | €3M | €3M |
| Base Interest Rate | 8.5% annual | 13.5% annual |
| Warrant Coverage | 5% (€150K at Series A valuation) | 0% (no warrants) |
| Term Length | 48 months | 36 months |
| Interest-Only Period | 12 months | 12 months |
| Total Interest Cost | ~€765K over 4 years | ~€1.08M over 3 years |
| Warrant Value at Exit | €1.2M (if 8x return on exit) | €0 |
| Total Cost to Company | €1.965M (€765K interest + €1.2M warrant value) | €1.08M (interest only) |
2021 Warrant-Based Deal
- →Lower stated interest rate appeared attractive
- →Warrants cost €1.2M in equity value at successful exit
- →Total cost 82% higher than pure interest alternative
- →Longer 48-month term created more cumulative interest
2024 Pure Interest Deal
- ✓Higher stated rate but zero equity dilution
- ✓Predictable total cost with no upside sharing
- ✓Shorter 36-month term reduced cumulative interest
- ✓Better economics if company exits at high valuation
Key Insight
In this example, the "cheaper" warrant-based deal ended up costing the company nearly €900K more due to warrant value at exit. As interest rates rose, pure interest models became economically superior for most growth companies planning successful exits. The decision should factor in your exit expectations and dilution tolerance.
How TULA Capital Can Help
Navigating the choice between warrant-based and pure interest structures requires market intelligence and modeling expertise. TULA Capital's advisors help founders:
- ✓Benchmark both structures across multiple lenders to find the best economic terms
- ✓Model the true cost of capital under different exit scenarios
- ✓Negotiate warrant coverage down or eliminate it entirely when market conditions allow
- ✓Connect you with lenders offering the structure that best fits your growth stage and cash profile