In a capital stack, which financing instrument typically sits above equity and influences the waterfall distribution?

• A. Senior debt
• B. Subordinated debt
• C. Mezzanine debt
• D. Equity

Answer: (C)

In a capital stack, distributions flow from the top down: debt gets paid before equity, and the layer between debt and equity shapes how remaining cash is allocated. Mezzanine debt sits between senior debt and equity, so it has priority over equity but is subordinate to senior debt. This position means it directly influences the waterfall by taking a portion of distributions before equity, often with its own return plus potential equity upside (like warrants or conversion rights). That combination of fixed return and upside is what makes mezzanine debt the typical instrument that sits above equity and shapes how proceeds are allocated. Senior debt is higher in priority but not the middle layer that directly sits above equity, while subordinated debt can be similar but isn’t the standard label for the layer that commonly bridges debt and equity with upside participation. Equity sits last in the waterfall.