Venture Debt: a Loan and a Security Package
Venture debt consists of two layers: the loan contract (623, 625) and a security package under pledge law (254, 256, 274). The United States venture-debt frame with warrant coverage has no standalone Georgian form: the local instrument is a loan and a pledge, and an option over shares must be carved out as a separate instrument.
This page describes both layers and shows how the Georgian Code unites the debt and the security elements into one structure.
The Loan Layer and the Interest Ceiling
Under Article 623, the lender transfers money into the borrower’s ownership, and the borrower undertakes to return things of the same kind, quality and quantity. Venture debt is a loan regardless of whether the lender is a bank, a fund or a private investor.
Article 625 leaves interest to agreement but sets a boundary: the annual effective interest rate must not exceed 50 percent, and the requirement applies to every type of loan. An additional rule exists: a loan of up to 200 000 lari must be extended only in lari, save where the borrower’s aggregate obligations to the same lender exceed 200 000 lari.
The Concept of Pledge and the Object of Security
Article 254 defines the pledge: a movable thing of the debtor or a third person, and/or a non-material property good whose transfer to other persons is permissible, may serve as a means of securing both monetary and non-monetary claims — such that the pledgee acquires the right to satisfy the claim through realization of the pledged property or, by agreement of the parties, through taking it into ownership.
For a venture-debt package this is a wide choice: equipment and inventory, receivables and intellectual property — every movable or non-material good whose transfer is permissible may be the object of pledge. Pledge may also secure future or conditional claims, and property that the pledgor will acquire in the future may serve as security — future property becomes a means of security upon its acquisition.
A pledge securing a non-monetary claim is valid only where the claim can be expressed in monetary form — rare in venture debt, but relevant where non-monetary compensation is stipulated.
The Scope of the Pledge
Article 256 defines what the pledge actually secures: the claim and other accessory rights connected with it — including interest and penalties — as well as the costs of preserving, litigating and realizing the property, unless law or agreement provides otherwise.
The pledge extends to the fruits derived from the pledged object, unless the parties agree otherwise. In venture-debt planning this means that future income from the pledged assets and the interest are covered by one package.
Alienation of the Pledged Asset
Article 274 is critical for a startup’s freedom of movement: on alienation of the pledged object, ownership encumbered by the pledge passes to the acquirer. There are two exceptions: under a possession pledge, where the pledgee or a person authorized by it transfers possession of the object to the acquirer, the pledge terminates and unencumbered ownership passes; and where the pledgor alienates the object within its ordinary entrepreneurial activity, unencumbered ownership passes — unless the acquirer and the pledgor acted in bad faith.
With a registered pledge, upon alienation the pledgor and the acquirer jointly bear the obligation to register the acquirer as pledgor in the public registry, failing which they are jointly liable for any damage caused.
The concept of the loan contract stands in the Code itself: the lender transfers into the borrower’s ownership money or other generic things, and the borrower undertakes to return things of the same kind, quality and quantity. The interest rules are decisive as well: by agreement of the parties interest may be stipulated for the loan, and in a mortgage-secured loan the monthly interest rate must be indicated directly — and the law also regulates the limits of interest rates.
Frequently Asked Questions
Below are the most frequent questions about venture debt.
Under which contract is venture debt extended?
A loan contract — the Code does not restrict the lender’s status.
What can be the object of pledge?
A movable thing or a non-material property good whose transfer is permissible — including future property.
What does the pledge secure?
The claim, interest, penalties and costs; also the fruits, unless agreed otherwise.
Can a pledged asset be sold?
Yes, and ownership encumbered by the pledge passes to the buyer — the exceptions are the possession pledge and ordinary-course alienation.
Is there an interest ceiling?
Yes — the annual effective rate must not exceed 50 percent.
How We Help on Legal.ge
The lawyers of Legal.ge help you build the full venture-debt structure: we assemble the loan layer within the lawful interest ceiling, choose the pledge package to match your assets, and protect the rules of alienating the security. Contact us — a correctly pledged loan remains reliable for the fund and breathable for the company.