What is Junior Equity?
Junior equity is an issuance of stock that is subordinate to other stock issued by a company.
How Does Junior Equity Work?
For example, if Company XYZ issues preferred stock, those shares are senior to Company XYZ's common stock shareholders. This means that should Company XYZ go bankrupt, the preferred shareholders are entitled to repayment before the common shareholders are. The common stock is therefore the junior issue.
Why Does Junior Equity Matter?
Owners of senior equity get their hands on leftover cash before others in the event of bankruptcy. Accordingly, owners of junior equity (those further down in the pecking order) are more likely to get stiffed. That is, the more subordinate an owner or issuer is, the weaker its claim on the company's assets. This is why the more junior the equity is, the higher the return investors demand.