---
title: "What Is Mezzanine Debt?"
term: "Mezzanine Debt"
description: "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."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/mezzanine-debt
---

# What Is Mezzanine Debt?

> 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.

**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:

1. Senior bank or unitranche debt (lowest cost, strict covenants, first claim on assets)
2. **Mezzanine** (subordinated, higher [margin](/glossary/margin-debt), may include PIK interest)
3. Preferred and common equity

Mezzanine lenders accept weaker collateral rights in exchange for returns in the mid-teens or higher, plus [warrants](/glossary/warrant) 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](/glossary/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](/glossary/mezzanine-financing), [venture debt](/glossary/venture-debt), [PIK interest](/glossary/pik-interest), and [capital structure](/glossary/capital-structure).

## FAQ

### What is mezzanine debt in simple terms?

Loan money that gets paid back after senior lenders but before shareholders if things go wrong. Lenders charge higher interest and often want warrants because the risk is higher than a bank line.

### Why does mezzanine debt matter?

It bridges capital needs without immediate dilution. In distress, mezzanine can convert to equity or take control—founders should read subordination and covenant terms carefully.


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Source: https://venturecapitaltracker.com/glossary/mezzanine-debt