Mezzanine debt often includes a preemptive right. What does this preemptive right allow?

• A. The holder to buy discounted shares before others
• B. The right to convert debt into equity at par
• C. The right to demand immediate repayment
• D. The right to vote on corporate strategy

Answer: (A)

Preemptive rights protect an investor from dilution by giving them the option to participate in future equity issuances. In mezzanine financing, this means the holder can buy new shares before other investors, usually at favorable terms (often described as a discount to the new issue price). This preserves the investor’s proportional ownership and potential upside from the company’s equity. It isn’t about converting debt into equity at a set price, nor about demanding immediate repayment, nor about voting on strategy. So the best description is that the holder may buy discounted shares before others to maintain their stake in future equity rounds.