What is mezzanine debt? Mezzanine debt uses a combination of subordinate debt and equity options to raise money for an acquisition or business expansion. The lender/investor loans the company part of the money and invests in the company for the remainder. The debt is subordinate to the company's other debt, meaning it has claims on the cash flow after the primary debt has been paid. The investment is usually in the form of warrants or conversion options that are paid out when the company goes public or refinances all of its debt. Mezzanine debt only works for companies with healthy cash flows. Service companies with little brick and mortar collateral required by traditional lenders, can benefit from mezzanine financing. Mezzanine debt is for middle-market companies with total revenue of generally less than $500 million.
Because the lender/investor has two roles, they are concerned about short-term cash as well as long term equity gains. Advantages/Disadvantages Advantages
You are not allowed to advertise ownership interests in your business or sell to people you do not know unless you have registered with the SEC (Securities and Exchange Commission). Registering with the SEC is a cumbersome process, and few non-public companies go through the process.
You can, however, sell an ownership interest to people who meet the SEC requirements for an "accredited investor" through a private placement. There are multiple ways that someone can be an accredited investor, but usually it means they have a net worth of $1 million at the time of purchase. Click here for complete information.Private placement means that the sale was made to someone known to the financial intermediary or the seller; i.e. there was no advertising to the public at large. Even if you use a private placement to an accredited investor, it is strongly suggested that you work with an attorney experienced in private placements. The difference between angels and early stage venture investors
Angel investors are wealthy individuals who invest in businesses on a part-time basis. Early stage venture investors are professional investors who invest for a living.