07 April 2021


Author/Compiled by
Cora Craigmile (cewas)

Executive Summary

Issuing equity is a well-established way for companies to raise capital. It means that the company is selling part of its ownership – so-called shares which come at a pre-defined price – to an investor. Quasi-equity, on the other hand, is a hybrid mechanism for a company to raise funds, meaning that it has characteristics both of equity as well as debt. Technically, it can be considered as debt, but has some equity features such as flexible repayment options or lack of collateral requirements (Uba, et al., 2020). While being structured as debt, quasi-equity can in some cases be converted into equity or preferred equity (Interreg Europe, 2019). 

Quasi-equity instruments are ranked between senior debt and equity in terms of liquidation priority. Thus, in case of bankruptcy, quasi-equity is considered junior to all bank debt, but senior to all equity shareholders. As the risk is considered to be higher than with traditional loans, they usually also come with higher returns. Repayment and returns depend largely on the design of the instrument and the performance of the recipient (Uba, et al., 2020). Quasi-equity is also frequently referred to as mezzanine finance.

When are a Quasi-Equity a good financing option?

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Quasi-equity becomes interesting if things are going great for your young enterprise, your operations are picking up, you are on the trajectory towards the stars – yet you struggle to find any traditional financiers to inject you with the crucial cash that will allow you to grow and keep control over your mounting expenses and needs. Traditional lenders, perhaps a business’ usual go-to, are wary of your lack of track record and your inability to provide collateral. One of the biggest perks of quasi equity is its inherent flexibility and adaptability, giving both you and the potential investor the freedom to draw the terms and conditions that best suit your unique case. Particularly, its ability to find more favourable alternatives to the elements that tend to put young enterprises off the idea of more traditional forms of financing, such as alternatives to significant company ownership dilution or strict repayment schedules.

The following (non-comprehensive) characteristics and implications provide you with an overview to analyse the pros and cons for this investment instruments:


Enterprise Lifecycle

All stages, especially early & growth stage



Pay-back period (Maturity)

Usually flexible between 2 to 8 years

Use of funds

mostly unrestricted

Source: Based on (Roots of Impact, 2020)


The following table summarises some key characteristics of Quasi-Equity and implications you should consider:


What does this mean for your enterprise

Quasi-equity is non-dilutive.

Even though quasi-equity is generally considered as equity from an economic standpoint, it may be classified as debt on the balance sheet. This means that usually there is no dilution of ownership of your company, as opposed to traditional equity (Attract Capital, 2018).

Quasi-equity can provide a more accessible alternative to traditional financing.    

You may find yourself needing to invest into scaling activities, but not having the necessary collateral (e.g., assets or private capital) to raise traditional debt like regular bank loans. There are several quasi-equity instruments that have more lenient requirements for collateral - see table below.

Quasi-equity is affordable.

Based on the higher risk for your investor, which is due to your company’s lack of track record, quasi-equity isn’t cheap and usually more expensive than a traditional loan. However, it is still cheaper than equity, where repayment terms can be astronomical (BDC).

Funding can be unlocked for early-stage, promising enterprises and repayment terms are flexible.

So, things have been going well for your young business, and you urgently need a cash injection to keep growing. However, traditional lenders such as banks keep turning you down based on your lack of track record or collateral. Quasi-equity bypasses this. In addition, quasi-equity instruments understand the need to keep cash at hand in the first few years of growth, which means that your first 1-2 years are often repayment-free.

Keep control over your spending even once cash has been secured.

Needless to say, quasi-equity isn’t free money. Even though terms may be flexible, you will be required to pay back at some point. While thorough planning and projections are key to receiving financing in the first place, you should make sure that you have contingency plans in place for different scenarios, such as not meeting your sales targets or even exceeding them. Based on this, you’ll know how to adjust your other expenses, keeping you on track to meet your repayment terms. Milestones will also help you stay on track (BDC).

Your investor has an interest in your growth – use their expertise!

Naturally, a quasi-equity investor has stakes in your success. Given that many investors have vast experience and broad portfolios of prior investments, it would be a shame to let the opportunity go to waste to learn from them about best practices, management, or tap into their network of connections. However, quasi-equity should not give an investor the right to interfere in your business without being asked to.

Key features

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The following key features and considerations related to quasi-equity are important to understand:

  • QE is a hybrid from of financing that borrows components from both equity and debt financing.
  • QE offers borrowers more favorable repayment schedules, although these will depend on the financing instrument used, the investor, and the return on investment (ROI) for the investor. Think about it this way: With QE, if an investor thinks that your company is projected to grow significantly, it will not want to set strict repayment schedules that could potentially get in the way of your growth. At the end of the day, the investor has their eye set on the future equity of your company, so she will likely want to work with you, not against you.
  • Although with QE, your investor accepts a lower risk than with equity, she still accepts a higher risk than senior debt. Similarly, in the event of bankruptcy, QE investors will be paid before equity investors but only after senior debt holders.
  • QE is for those early-stage companies that have started to grow quickly and have good future cash flow projections. If that is not the case for you, you might want to consider other forms of financing.
  • Because QE usually doesn’t require collaterals and it takes on a higher risk for investing so early on in your company, it tends to be more expensive than traditional loans. Having said that, it is significantly cheaper than equity financing.

The Business Development Bank of Canada (BDC (N/A) has put together some learned lessons from fast-growing start-ups that have opted for quasi-equity:

  1. Use “what if” scenarios: Your company might be projected to grow and reach set milestones but market volatility is unpredictable and the more you consider and prepare for every possible scenario the more you will be able to adapt to unexpected change
  2. Tie spending to milestones: Allocating funds to specific milestones within your growth plan will allow you keep more control over the future success of your company.
  3. Stay focused on your finances: Detaching yourself from your finances and leaving it all up to your finance team is not a good idea, if you want to stay on top of things and make wise company decisions. Having a good understanding of where your company finances stand, including what percentage of future equity you have sold, will put you in a better position to make good company decisions that will steer your company towards greater success.
  4. Approach lenders early: It is a good idea to start considering your QE financing options as soon as you start having your first customers. Leaving it to a later stage when your company is starting to grow could potentially put pressure on other equally important priorities, since efforts to raise financing require significant company resources. The earlier you explore your options the better!

Quasi-Equity in the Water Sector

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To access quasi-equity, you will have to make a strong case for being able to repay what you get. As compared to regular debt, some types of quasi-equity investments have specific benefits that could be beneficial for different water-related enterprises. In some cases, the loan elements are only repaid in the last years of the investment period, which is particularly relevant for enterprises that have to invest into assets like wastewater treatment plants or distribution infrastructure that need a certain period of time until they generate revenues. In the case of revenue-based loan, enterprises only repay loans in relation to the actual revenues they generate. This investment structure can be interesting for impact-oriented start-ups and enterprises that are subject to seasonal fluctuations, as it meets the investor’s requirements while not “suffocating” the start-up during periods of lower revenue generation.

Convertible notes on the other hand, as loans that can be converted into equity, or SAFE investments in which investors bank on the equity elements of mezzanine finance, are particularly interesting for start-ups with proven market-based business models, like smart network management solutions or specific water treatment solutions.

Explore the following Quasi Equity instruments with specific water-related examples:



Convertible note

QE: Convertible notes

Venture debt

QE: Venture debt

Subordinate loan

QE: Subordinated loan

QE: Revenue-based loan

Library References

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