Glossary - Mezzanine Level
Mezzanine level financing is a layer of financing between senior secured debt and equity that usually involves a mix of debt and equity instruments. These financial instruments often give the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back on time and in full. It is typically used to finance the growth of existing companies rather than serving as startup capital.
Also known as
- Mezzanine Debt
- Mezz Financing
- Subordinated Debt
Use cases examples
- Term Sheet: The company agreed to a mezzanine level financing round consisting of subordinated debt and warrants to purchase equity.
- Loan Agreement: Under the terms of the agreement, the lender provided mezzanine financing to the borrower, which will be convertible into common stock at the lender's option.
Considerations for investors
- Investors should evaluate the company's ability to meet its debt obligations to avoid conversion to equity, potentially diluting the value.
- Mezzanine level investments carry a higher risk but offer the potential for higher returns compared to senior debt.
Considerations for founders
- Mezzanine financing can be expensive due to the higher risk for lenders, but it does not require giving up as much control as equity financing.
- Founders should be prepared for potential dilution of their ownership if mezzanine debt is converted to equity.
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