Why it matters
Prepayment penalties are why founders who raise venture debt or RBF at the wrong time can't escape it. A common structure: borrow $2M at a 1.4× cap ($2.8M total payback), and the prepayment clause says 'repayment of the full Repayment Amount is due in full upon any prepayment.' You raise a Series B six months later, want to retire the debt to clean up the balance sheet, and discover the prepayment cost is the entire $2.8M — meaning your effective interest rate for six months was 40%. The clause is justified to founders as 'protecting the lender's expected return,' but its real function is preventing competitive refinancing. Founders should negotiate this on day one.
How to negotiate
Push for declining prepayment penalties: 100% of remaining repayment cap if prepaid in months 1–6, 75% in months 7–12, 50% in months 13–18, 0% thereafter. Or negotiate a 'minimum interest' floor instead — you must pay enough to reach a 15–20% IRR for the lender, but no more. Avoid clauses that require full repayment regardless of timing; they convert your loan into a take-it-or-leave-it instrument.
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.
Borrower may prepay all or any portion of the Loan at any time without notice; provided, however, that any such prepayment shall include the full Repayment Amount as if the Loan had been outstanding for its full term, and Borrower shall not be entitled to any reduction or rebate.
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.