In today’s competitive business landscape, companies are often faced with challenges when it comes to raising capital for their growth and expansion plans. While traditional financing options such as bank loans and equity investments are widely available, they may not always be suitable or sufficient for the ambitious growth objectives of companies. This is where mezzanine funding emerges as a valuable financing tool. Mezzanine funding, a hybrid form of capital, fills the gap between debt and equity financing, providing companies with flexible and tailored financing solutions. This article explores the key features of Mezzanine funding.

Key Elements of Mezzanine Funding

Mezzanine funding typically has the following characteristics:

  1. Subordination: Mezzanine debt is subordinate to senior debt, meaning that in the event of liquidation, debt holders have priority in repayment.
  2. Relaxed repayment terms: Repayment terms in respect of Mezzanine debt is more relaxed and often conditional upon profits being made in the company.
  3. Higher Interest Rates: The increased risks for Mezzanine lenders regarding the subordination of debt and relaxed repayment terms are usually compensated with higher interest rates.
  4. Equity Conversion Option: Mezzanine financing usually includes an equity conversion option, allowing Mezzanine lenders to convert their debt into equity under predetermined conditions. This feature provides an additional upside potential for Mezzanine lenders while aligning their interests with the long-term success of the company.
  5. Equity Kickers: Mezzanine lenders may also receive equity kickers as part of their investment. These additional rights allow Mezzanine lenders to purchase shares of the company at a predetermined price, offering them the opportunity to participate in the company’s growth and value appreciation.


Mezzanine funding serves as a valuable tool for companies seeking additional capital to fuel their growth and expansion plans. It is however important that Mezzanine funding structures are supported by proper planning and legal agreements to ensure that the Mezzanine funding elements agreed upon may be efficiently, practically and legally executed.

VDMA’s team of experts are available to you and your business for purposes of assisting with the drafting of funding agreements pertaining to Mezzanine debt

Published 17 July 2023