Why it matters
Venture-backed companies are volatile. Hitting a minimum-revenue covenant of $4M ARR every quarter sounds easy when you're at $5M and growing — until a sales cycle slips a month and your Q2 lands at $3.7M. Now the loan is in default, the lender takes board control or accelerates, and your Series B partner walks because the company's lender just lost confidence. Liquidity covenants ('minimum $3M unrestricted cash at all times') are even more dangerous: they can force you to stop hiring, freeze marketing, or do an emergency bridge at a bad valuation just to stay in compliance. The covenant doesn't measure whether your business is healthy — it measures whether you've defaulted on the loan.
How to negotiate
Negotiate covenants based on rolling-six-month or trailing-twelve-month metrics, not single-quarter snapshots. Push for cure rights — typically the right to inject equity capital (or have an investor inject it) within 30 days to restore compliance without triggering default. Ask for the liquidity covenant to be set at 1.5–2× monthly burn rather than a fixed dollar amount, so it adjusts as the company grows. If the lender demands quarterly tests with no cure rights, the deal is structured to take the company on default, not to fund growth.
Example language
How this clause typically appears in a debt agreement or note. Read it carefully — the language that triggers default is often buried in routine paragraphs.
The Borrower shall maintain, as of the last day of each fiscal quarter, (i) Net Revenue of not less than $4,000,000 measured on a trailing three-month basis, and (ii) Liquidity of not less than $3,000,000 at all times. Failure to satisfy either covenant shall constitute an immediate Event of Default.
TURNSHEET provides intelligence, not legal advice. This page describes typical market behaviour and common negotiation tactics; your specific facility may have nuances that change the analysis. Always review your debt documents — including covenants, intercreditor agreements, and personal guarantees — with qualified legal counsel before signing.