Great for — 

• Companies that have reached significant scale are able to access this form of funding that can be used as a replacement to equity. These lenders are looking for similar returns to equity and will ask for large amounts of warrants in compensation. 

• Despite the high interest rates on the loan, companies don’t pay back the loan amount until the end of the loan and can allow the business to utilize that cash elsewhere during the life of the loan. 

• If a company already has other debt but is looking for additional capacity, Mezzanine will still work because the loan will be subordinate to the other loan. 

• Large and flexible capital infusion to the business with much less dilution and loss of control than an equity round. 

Things to Watch Out For —

• Companies will need to plan and prepare to make the loan amount payment at the end of the loan. While Mezzanine Finance can give flexibility and similar cash flow advantages of equity, it can be an extraordinary cost to the business when it is time to pay the loan amount at the end of the loan.

• Some lenders may ask for more Warrants based on milestones or other triggers which you should try to avoid. To make sure you have the right understanding and transparency, have the lender state the number of shares that they are asking for in a warrant.  

• Some lenders may want to be able to exercise warrants before an exit of a business. If a lender is selling shares of the business before exit, some investors may see this as a bad sign if they interpret it as lost confidence in the business.

• The loan may have many restrictions on how the business can use the loan or other business operations to give lenders more comfort given the company doesn’t payback a portion of the loan for a period of time.