Mezzanine financing refers broadly to capital raised through subordinated debt structures—often combined with warrants or conversion rights—rather than pure equity or senior bank loans.

How it works

Providers include mezzanine funds, BDCs, and specialized lenders. Typical package:

• Subordinated term loan with cash and/or PIK interest
• Warrants for common or preferred equity
• Covenants lighter than bank debt but heavier than pure equity

Use cases:

• Buyouts: Bridge equity gap after senior debt maxes out at leverage limits
• Growth recap: Fund acquisitions or expansion with less dilution than primary equity
• Recapitalizations: Replace or supplement investor equity with structured capital

Cost sits between senior debt and equity expected returns. Founders compare all-in cost (interest + warrant dilution) against priced equity.

Why it matters

• Founders: Negotiate intercreditor agreements if senior and mezzanine coexist—who gets paid first in stress drives outcomes.
• Investors: Mezzanine can extend runway without new VC pricing but may constrain future rounds if leverage covenants bind.

Common mistake

Using mezzanine to avoid a down round without fixing unit economics. Debt amplifies both upside and downside.

Related ideas

See also mezzanine debt, mezzanine fund, equity kicker, and growth equity.