quasiequity

Quasiequity refers to a category of financing instruments that sits between debt and equity. These instruments provide capital to a company while incorporating some equity-like features, yet they are not conventional ownership shares with voting rights. The defining trait of quasiequity is its blend of risk and upside: lenders may participate in a company’s success through features such as profit sharing, warrants, or conversion options, while still retaining characteristics of debt, such as fixed or capped returns, subordination, or repayment obligations.

Common forms of quasiequity include convertible debt, mezzanine financing, preference shares with participation rights, and profit-participating loans. Convertible instruments can be converted into equity at a specified price or on certain events, while mezzanine finance often sits between senior debt and equity in the capital structure and may include warrants or step-up interest. Preference or participating securities provide priority or enhanced returns without guaranteed voting rights.

Quasiequity is often used to raise capital while limiting immediate ownership dilution or preserving control for current owners. It can be appealing to startups seeking growth funding or to companies pursuing a bridge to a future equity round. However, quasiequity usually carries higher cost of capital than senior debt and can impose complex covenants, incentive structures, or dilution upon conversion.

Accounting, tax treatment, and regulatory considerations for quasiequity vary by jurisdiction and instrument type. Classification as debt or equity on financial statements depends on specific features, such as convertibility, payout obligations, and control rights.