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Performance-Sensitive Debt: From Asset-Based Loans To Startup Financing, Houman B. Shadab

Articles & Chapters

This Article develops a unique theory of performance-sensitive debt and argues that certain revenue-stage startups may be missing out on an important source of capital from asset-based loans. Debt contracts are performance sensitive to the extent any of the borrower’s obligations adjust in response to the performance of the borrower. The three main types of performance sensitivity I identify are (1) a loan’s interest rate adjusting based on the performance of the borrower; (2) the amount of available credit adjusting based on the value of collateral; and (3) renegotiation following breach of a loan covenant. Conceptualizing performance sensitivity as a …