The Story: A Founder at the Crossroads
In December 2024, Cohesity, the AI-powered data security company founded by Mohit Aron, closed one of the more instructive capital structure deals of the year. The company completed a transformative combination with Veritas’ enterprise data protection business, vaulting itself to become the world’s largest data protection software provider by market share and crossing $1.5 billion in annual revenue in just eleven years. The headline numbers were striking. But what deserves closer attention is how the deal got done.
Rather than diluting existing shareholders with a pure equity raise to fund the acquisition, Cohesity structured the transaction using a combination of a new equity round (Series H, led by Haveli Investments) and a Term Loan B facility arranged by JPMorgan Chase. The combined company was valued at over $7 billion: with existing backers like Sequoia Capital, SoftBank Vision Fund, and Wing Venture Capital retaining meaningful positions throughout.
To the untrained eye, layering debt onto a growth-stage tech company to fund a major acquisition might look reckless. To anyone who understands capital structure and the real cost of equity dilution, it looked like discipline. Cohesity used debt (structured around its durable, subscription-based cash flows) to execute a category-defining move while its founders and early equity holders kept their ownership stakes as intact as the deal permitted.
This is the leverage recap playbook in action. And in 2024 and 2025, more founders are running it than ever before.
The Decision: Equity Costs More Than You Think
Consider what the purely dilutive path would have looked like for Cohesity. To fund a transformative deal at a $7 billion combined valuation entirely with equity, the company would have had to sell a significantly larger slice of its cap table, likely at terms shaped by a seller’s leverage and investor return expectations. Each new equity investor demands ownership and, implicitly, a future liquidity event on their timeline, not the founder’s.
Instead, by pairing the Series H equity with a Term Loan B (a senior secured debt instrument commonly used in leveraged buyouts and large acquisitions) Cohesity accessed the scale of financing the deal required while limiting how much of the company’s future upside was handed to new shareholders. The debt services predictable cash flows. The equity upside stays disproportionately with the people who built the company.
This calculus is now well-established in the data. According to PitchBook’s NVCA Venture Monitor, U.S. venture debt deals hit a record $53.3 billion in 2024, up 94% from 2023. The Runway Growth Capital and PitchBook 2024–2025 Venture Debt Review found that a majority of founders now view venture debt as a flexible, founder-friendly alternative to equity that supports growth without dilution, not a last resort. In a market where IPO timelines are the longest in over a decade and VC terms have tightened considerably, founders are prioritizing flexibility and control over headline interest rates.
The cost of that discipline? Debt service obligations and maintenance covenants, typically at least one leverage test measured quarterly in private credit deals. But for businesses with predictable, recurring revenue, that is a manageable trade-off compared to permanent equity give-up.
Hypothetical Scenario: The Lower Middle Market Founder Who Took Chips Off the Table
The following is a hypothetical illustrative case study, constructed using real market data from publicly available sources. It does not represent a specific real transaction.
Imagine a founder who has spent 18 years building a specialty industrial services business to $8 million in annual EBITDA, call him Marcus. His business generates stable, recurring revenues under multi-year contracts. Marcus owns 100% of the equity. He is 54 years old, healthy, and deeply engaged in running the company. He has no desire to sell. But 90% of his net worth sits in a single illiquid asset, the company itself.
Marcus’s Options:
- Option A, Full Sale to PE: Strategic buyers and private equity sponsors are circling at 7–8x EBITDA multiples, implying a $56–$64 million enterprise value. Marcus gets liquidity but loses control, his management team faces integration risk, and he likely stays on as a retained employee for a 2–3 year earnout period. The upside of the next chapter belongs to someone else.
- Option B, Leveraged Recapitalization via Private Credit: A private credit lender structures a unitranche facility at 4x EBITDA, $32 million in senior secured debt. Marcus takes the $32 million as a special dividend. He retains 100% of the equity. Annual debt service at approximately 11–12% all-in yield (consistent with current middle market direct lending rates) totals roughly $3.5–$3.8 million per year, well within the business’s $8 million EBITDA capacity, leaving meaningful free cash flow for operations and growth investment.
Marcus chooses Option B. He pockets $32 million: enough to diversify his personal net worth, fund his retirement baseline, and sleep through a down quarter without existential anxiety. He still owns the entire equity of a $64 million business. If the business grows from $8 million to $12 million EBITDA over five years, entirely plausible given his market position, and he sells at a similar multiple, the remaining equity is worth $80–$96 million. His total realised value: $112–$128 million, versus $56–$64 million in an immediate full sale.
The recapitalization math checks out precisely because the business had the cash flows to support it. According to the Pepperdine Private Capital Markets Report (2024), lower middle market leveraged recapitalizations typically close at 3x to 5x EBITDA in total debt: exactly the range Marcus’s lender used. The structure is not exotic. It is the deliberate application of leverage to unlock personal liquidity while preserving the full benefit of future value creation.
The Outcome: What the Numbers Actually Show
Back to the real world. Cohesity’s deal outcome is already visible. The combined entity serves over 12,000 customers, including over 85 of the Fortune 100. It has the broadest workload support and one of the largest partner ecosystems in data protection. It got there by being selective about which capital it used and when.
The broader market context reinforces the trend. Sponsors and owner-operators have increasingly turned to leveraged recapitalizations as an alternative liquidity mechanism, particularly as traditional exits remain constrained. IPO volumes remain well below historical norms, and with over 1,300 companies still valued at $500 million or more waiting for exit windows to reopen, the dividend recap has become a primary tool for returning capital to owners in the interim.
For lower middle market operators like Marcus in our hypothetical, the structure works with even cleaner alignment, because there is no PE sponsor clock ticking, no fund life pressure, and no board seat telling the founder when to exit. The debt provider simply wants interest coverage and covenant compliance. Control stays with the person who knows the business best.
The risk, of course, is real. If Cohesity’s subscription revenues contract or if Marcus’s industrial services revenues miss badly in a cyclical downturn, debt service becomes a constraint on reinvestment. According to S&P Global Ratings, average leverage across U.S. middle market credits hit 7x in 2024, with 20% of companies already below 1x EBITDA interest coverage, a sign that poorly sized recaps do happen and carry genuine consequences. The lesson is not that leverage is always right. It is that leverage sized correctly to sustainable cash flows is almost always preferable to permanent equity dilution.
The Lessons: A Framework for Capital-Structure Decisions
The Cohesity deal and the Marcus hypothetical illuminate the same underlying principle from two different vantage points: debt is a precision instrument; equity is a sledgehammer. Equity dilution is permanent. Interest payments end when debt is repaid.
Here is a practical decision framework for founders and operators facing similar inflection points:
When a Leveraged Recap or Debt-Funded Growth Strategy Makes Sense:
- Stable, predictable cash flows. Recurring revenues, long-term contracts, and low customer concentration give lenders confidence and give operators the coverage ratios to service debt comfortably.
- Meaningful EBITDA relative to debt size. Industry data shows middle market direct lending at 4.5x–5.0x EBITDA for senior secured facilities. Staying at or below 4x leaves adequate cushion.
- A specific use of proceeds. Whether funding a transformative acquisition (Cohesity) or personal diversification (Marcus), the capital has a clear purpose that improves the risk-return profile of the business or the owner.
- Owner has the operational depth to continue running the business under debt discipline. Covenants focus the mind. That can be a feature, not a bug, but only if management is prepared for the quarterly scrutiny.
When Pure Equity (or a Full Sale) Is the Correct Answer:
- The business has volatile or unproven cash flows that cannot reliably service debt.
- The capital need is for pre-revenue or early-stage growth where no asset base or cash flow exists to underpin a debt structure.
- The founder genuinely wants to exit and the full sale price reflects fair value for the risk carried to that point.
The critical insight from the 2024 data is that founders are increasingly sophisticated about this distinction. The venture debt market at $53.3 billion in 2024, up 94% year-over-year, is not a sign of desperation. It is a sign of maturity. Founders are reading the same math the private equity industry has always known: debt amplifies equity returns when the underlying business performs. The question is not whether to use leverage. It is whether your business deserves it.
Key Insights
- Debt is not the alternative to equity; it is the complement. Cohesity’s hybrid Series H plus Term Loan B structure shows how the two instruments can be layered intelligently to achieve scale without unnecessary dilution.
- The real cost of venture capital is measured in equity given away permanently. Every VC round that closes at the wrong time or wrong valuation is a compounding tax on the founder’s future upside, one that debt service does not impose.
- The lower middle market is the most powerful setting for leveraged recaps. Founder-owned businesses with $4–$15 million in EBITDA, strong local market positions, and predictable revenues are exactly the profile that private credit lenders target, and exactly the businesses where owner liquidity without full exit makes the most economic sense.
- Sizing matters more than structure. A recap at 3–4x EBITDA with strong coverage ratios is a powerful financial tool. A recap at 7x+ with thin margins is a trap. The difference between those two outcomes is underwriting discipline, not the concept of leverage itself.
- The window is open, but selective. According to PitchBook data, venture debt deal count dropped to its lowest level in a decade even as dollar volume hit records, meaning lenders are concentrating capital in stronger credits. If your business qualifies today, the terms available are among the most founder-friendly in years. If it does not qualify, that is important information about the underlying business, not the financing market.
