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CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt

Venture debt provided to an early-stage company most likely includes which feature to compensate the lender for the borrower's high risk?

Venture debt most likely comes with equity warrants. Because early-stage borrowers have limited cash flow and high failure risk, lenders obtain the right to buy shares at a set price, which adds upside to the interest income.

  1. AEquity warrants giving the lender the right to buy sharesCorrect
  2. BA fixed-rate government guarantee on principal
  3. CPriority claim on future dividends to common shareholders

Explanation

Venture debt lenders commonly receive warrants, giving upside participation in the company's equity value beyond interest. Government guarantees are not typical, and dividend priority is an equity feature irrelevant to lender compensation.

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