In venture capital terminology, the term Mezzanine Debt refers to a subordinated debt or a preferred equity instrument used for venture capital funding. Mezzanine Debt is only one step higher than the common stock of the company in the company’s overall capital structure.
For example, Mezzanine Debt will often be issued in the form of shares of preferred stock or as unsecured debt in the form of subordinated notes, which are debt instruments subordinated under the normal corporate bonds which generally get preference in the event the company goes bankrupt. Mezzanine Debt behaves much like the stock of the company in terms of its valuation, and it also includes convertible preferred stock and warrants. Many companies also issue stock options as yet another form of Mezzanine Debt. Lenders of Mezzanine Debt generally take into account the rate of return of the financial instrument, which can be in the form of cash interest, Payable in Kind or PIK interest, and ownership interest.