---
title: "What Is PIK Interest?"
term: "PIK Interest"
description: "PIK interest is interest on a loan that accrues to the principal balance or is paid with additional debt securities instead of cash—compounding the amount owed over time."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/pik-interest
---

# What Is PIK Interest?

> PIK interest is interest on a loan that accrues to the principal balance or is paid with additional debt securities instead of cash—compounding the amount owed over time.

**PIK interest**—payment-in-kind interest—is non-cash interest that increases the loan balance or is settled by issuing additional notes rather than wiring periodic payments.

### How it works

Loan documents specify a cash-pay rate and sometimes a higher PIK rate if the borrower elects PIK during defined periods. Each accrual period adds interest to principal, and future interest compounds on the larger base. At maturity, refinancing, or acquisition, the company repays the inflated balance—or converts if the instrument is convertible.

Venture lenders may allow PIK during ramp phases; covenants often require reverting to cash pay when revenue thresholds are met. Credit investors in distressed situations may accept PIK when cash pay is impossible.

Document whether PIK interest compounds on itself or only on original principal—compounding terms change the balance at maturity materially over multi-year holds. Founders should align PIK end dates with expected equity or refinance events.

Accounting treatment accrues PIK as interest expense on the borrower P&L even without cash movement, which can affect covenant ratios tied to EBITDA or fixed charges.

### Why it matters

- **Founders:** Trade short-term liquidity for higher eventual obligation—compare total cost to raising equity or cutting burn.
- **Investors:** PIK increases senior claims ahead of preferred and common in waterfalls; heavy PIK can wipe common in moderate exits.

Include PIK accrual in exit waterfall models any time venture debt sits ahead of common.

### Common mistake

Ignoring PIK in exit models because no cash left the company monthly. The liability still reduces equity proceeds at close.

### Related ideas

See [payment-in-kind (PIK)](/glossary/payment-in-kind-pik), venture debt, and interest accrual.

## FAQ

### What is PIK interest in simple terms?

It is interest you do not pay in cash now—it gets added to what you owe later, so the loan balance grows even if you are making no cash interest payments.

### Why does PIK interest matter?

It helps cash-strapped startups stay current on paper while increasing total debt at exit. Equity holders should model how PIK accrual affects proceeds after debt repayment.


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Source: https://venturecapitaltracker.com/glossary/pik-interest