Downside Case A: Your vested equity is worth $10mm and you borrow $1mm, but your total vested equity ends up being worth $500k in a fire sale, you would owe $500k.
Downside Case B: Your vested equity is worth $10mm and you borrow $1mm. Your total vested equity ends up being worth $1mm in a fire sale, you would owe $1mm.
In any downside case, you would owe no more than what you receive from a liquidity event. There is no scenario where you only make $100k but owe $1mm, for example. There would be no call back clauses, the loan would only be due upon a liquidity event.
Upside Case A: Your vested equity is worth $10mm and you borrow $1mm. Your total vested equity ends up being worth $100mm in an IPO, you would owe $1mm + interest ($250k?) + $900k shared upside.
Definitely less upside than an equity investment, but there are large institutional investors that want access to the venture capital asset class but can't get access to hot deals. I work in VC and have seen this first hand. This would be a vehicle to give them some exposure to hot companies. Moreover, it could expand into employee equity as well, which increases capacity for capital allocation.
I modeled the probable distribution, and in the midpoint scenario, a portfolio of 100 Seed-Series C startups would likely return 10-15% net IRR. That's good enough to attract institutional capital.