Mezzanine financing occupies the middle floor of the capital structure that gives it its name: junior to senior bank debt, senior to equity. It is usually structured as subordinated debt paying a high coupon, sweetened with warrants or conversion features that give the lender equity upside.
The anatomy of a mezzanine deal
- Position: repaid after senior lenders but before preferred and common shareholders in a liquidation
- Pricing: the risk premium shows up in total return targets in the mid-to-high teens, blending cash interest, paid-in-kind (PIK) interest that accrues rather than pays, and equity kickers
- Term: five to seven years, often with no amortization until maturity
- Covenants: heavier than venture debt, lighter than bank debt
Where it appears in the startup world
Mezzanine is late-stage capital. Venture-backed companies encounter it in a few situations: funding acquisitions, financing pre-IPO growth when the founders refuse further dilution, leveraged recapitalizations that let early shareholders take money out, and — in the private equity context — filling the gap between senior debt and sponsor equity in a buyout. The term "mezzanine round" is also sometimes used loosely to mean any pre-IPO financing round, which muddies the water; the strict meaning is the debt-equity hybrid instrument.
Mezzanine vs venture debt
Both are loans to growth companies, but they serve different animals. Venture debt underwrites the likelihood of the next VC round at a Series A/B company burning cash; mezzanine underwrites the actual cash flows of a later-stage business that could plausibly service debt. A profitable $50M-revenue company choosing between a dilutive growth round and mezzanine debt is the textbook customer.
The trade
Mezzanine exists because it lets owners raise substantial capital while keeping control and most of the upside — in exchange for fixed obligations that, like all leverage, amplify both good and bad outcomes.