VC & PE Glossary
What Is Mezzanine Debt?
Updated
Definition
Mezzanine debt is subordinated debt sitting between senior bank debt and equity—higher yield, fewer covenants than bank debt, often with warrants or conversion features.
Useful for: Founders, Investors
Mezzanine debt is a layer of financing junior to senior secured debt but senior to common equity, typically carrying higher interest and equity kickers.
How it works
Capital structure stacks:
- Senior bank or unitranche debt (lowest cost, strict covenants, first claim on assets)
- Mezzanine (subordinated, higher margin, may include PIK interest)
- Preferred and common equity
Mezzanine lenders accept weaker collateral rights in exchange for returns in the mid-teens or higher, plus warrants or conversion options. In buyouts, mezz fills the gap between senior debt and sponsor equity.
Terms may include cash interest plus payment-in-kind (PIK) that accrues to principal. Default can trigger equity conversion or control rights.
Venture-stage companies more often use venture debt; mezzanine appears in profitable growth and PE-backed businesses.
Why it matters
- Founders: Mezzanine reduces dilution but adds fixed obligations and intercreditor complexity. Model downside scenarios with senior and mezz claims ahead of common.
- Investors: Mezzanine return targets influence how much equity a deal needs. Over-levering constrains strategic flexibility.
Common mistake
Treating mezzanine as “friendly equity.” It is debt with hard repayment and enforcement rights in stress scenarios.
Related ideas
See also mezzanine financing, venture debt, PIK interest, and capital structure.
Related terms
- Mezzanine Financing — Mezzanine financing is capital provided through subordinated debt and equity-linked instruments—warrants or conversions—used to fund growth or buyouts without full equity dilution upfront.
- Venture Debt — Venture debt is a loan or credit facility for venture-backed companies — typically repaid over three to four years, often with warrants — used to extend runway or fund assets without immediate equity dilution.
Common questions
Short answers for founders, LPs, and operators