TL;DR: Subordinated debt ranks behind senior debt for repayment in a default or wind-down, but ahead of equity. Because it carries more risk than senior debt, it typically costs more. It is also called junior debt or mezzanine debt, depending on structure.
Subordinated debt is any debt that is repaid after senior debt if a company is liquidated or defaults. It is junior to senior lenders but still ranks ahead of equity holders. To compensate for taking a lower position in the repayment line, subordinated lenders charge higher interest and often negotiate additional return through warrants or other upside.
Subordinated debt lets a company add capital on top of its senior facilities without raising equity. It can be a useful layer for funding growth or an acquisition when senior capacity is reached, though it comes at a higher cost than senior debt.
The distinction is purely about priority of repayment. Senior debt is paid first and is the lowest-cost layer. Subordinated debt is paid next, accepts more risk, and is priced accordingly. Equity sits below both. Where multiple lenders are involved, an intercreditor or subordination agreement formalises the ranking. The structure of a given facility, and any subordination, is defined deal by deal.
Why would a company take on subordinated debt? To raise additional capital beyond what senior lenders will provide, without diluting ownership through an equity round. The trade-off is a higher cost than senior debt.
Is venture debt senior or subordinated? It depends on the deal and the rest of the capital stack. Venture debt can be structured in a senior position or subordinated to an existing senior lender; the term sheet and any intercreditor agreement specify the ranking.
Related terms: Senior Debt · Capital Stack · Warrant · Venture Debt
