The Mezzanine Round: When and How to Structure It

The mezzanine round — the final private funding round before IPO — serves three functions: providing bridge capital to fund operations until IPO proceeds arrive, establishing a pre-IPO valuation benchmark that anchors the IPO pricing discussion, and bringing in pre-IPO specialist investors whose participation signals confidence to public-market investors. Mezzanine rounds are typically structured as convertible preferred with a conversion at IPO (with a discount to the IPO price, typically 15-25%) or as straight preferred that automatically converts at IPO. The key negotiation points are: the conversion discount (higher discounts compensate mezzanine investors for illiquidity risk but dilute earlier shareholders), the liquidation preference (typically pari passu with other preferred rather than senior), and information rights (mezzanine investors receive regular financial updates to monitor pre-IPO performance). The optimal timing for a mezzanine round is 9-12 months before the planned A1 filing — close enough for the IPO to be visible, but far enough for the round proceeds to be fully deployed in the business before prospectus disclosure.