Venture Debt as a Financing Alternative: Mechanisms of Viability and the Portuguese Legal Framework

Venture Debt has emerged as a distinctive form of financing, since it is aimed at startups which traditionally lack tangible assets and positive cash flows, conditions that are essential to enter into loan agreements. This creates an inherent contradiction from which several questions arise. The primary concern here is to understand the structures and mechanisms that make such transactions possible, i.e., what startups have to offer beyond tangible assets and predictable revenue streams to secure debt, and what strategies lenders adopt to feel protected when entering into these agreements. Once the paradox is resolved and the Venture Debt structure is defined, the study extends its analysis to situate Venture Debt within the Portuguese legal framework, and particularly assessing whether existing rules protect the distinctive vulnerabilities of startups and fight against the imbalances created by Venture Debt. To better understand these issues, the dissertation begins by clarifying the economic rationale of Venture Debt and its position within the broader spectrum of startup financing, drawing comparisons with other instruments to highlight its role as an alternative funding source. The core chapters then examine how Venture Debt becomes viable as a business model despite its structural contradictions, focusing on contractual design, risk-mitigation techniques, and incentive mechanisms that create balance between borrowers and lenders. It further considers how variables such as the stage of the company and the type of financial provider affect the legal and economic structure of the deal. One of these mechanisms, the hybrid equity component, creates additional challenges, by placing startups in structurally weaker positions, thereby leading the discussion into another dimension. Within this context, the dissertation also frames Venture Debt agreements under the Portuguese legal system, assessing whether existing rules ensure their effectiveness, enforceability, and fairness. By combining theoretical analysis with practical insights, this dissertation seeks to enrich the emerging academic debate on VD, particularly with regard to its structuring mechanisms and its treatment within the Portuguese legal system, while also serving as a valuable resource for practitioners, investors, and entrepreneurs engaged in the startup finance ecosystem.