Draft Subordination Agreement

---
name: ecvc-draft-subordination-agreement
task_id: emerging-companies-venture-capital/draft-subordination-agreement
description: Drafting a subordination agreement requires distinguishing lien subordination from debt subordination, addressing purchase money security interest carve-outs, considering bankruptcy-related consent provisions, specifying subrogation rights, and aligning governing law with the senior loan agreement.
activates_for: [planner, solver, checker]
---

# Skill: Draft Subordination Agreement

## 1. Subject-matter triage

- Determine at the outset whether the deal requires lien subordination, payment subordination, or both; draft the operative provisions to match that answer, not a generic intercreditor template.
- Confirm the senior facility, junior note, collateral package, and governing law before drafting so the agreement tracks the actual debt stack and enforcement mechanics.
- If the request includes a companion memo, treat the agreement as the primary deliverable and the memo as secondary.

## 2. Failure modes the skill is correcting

- The agreement blurs lien priority and payment priority, leaving the parties uncertain whether only collateral enforcement is subordinated or whether cash-pay rights are also deferred.
- The draft omits or weakens the senior lender’s full priority over defined senior obligations, creating gaps for interest, fees, expenses, and enforcement costs.
- Permitted lien carve-outs, especially purchase money security interests and other facility-allowed liens, are not aligned to the senior credit agreement’s lien basket.
- Bankruptcy-related consent language is missing or under-specified, creating uncertainty around post-petition financing, priming treatment, and junior lender approval rights.
- Subrogation and turnover mechanics are not tied to full repayment of the senior obligations, which can distort post-discharge recovery rights.
- Governing law, forum, and interpretation provisions diverge from the senior loan documents, increasing conflict risk in enforcement or insolvency.
- The companion memo explains conclusions without identifying how the competing lender and noteholder positions were reconciled.

## 3. Legal frameworks / domain conventions that apply

- Lien subordination and payment subordination are distinct. Lien subordination addresses priority in collateral proceeds; payment subordination addresses timing and entitlement to receive cash. Draft each expressly if both are intended.
- “Senior Debt” should capture principal, accrued interest, default interest if used, fees, reimbursement obligations, indemnities, expenses, and enforcement costs to the extent the senior package defines them.
- Payment subordination should specify the trigger state: always, upon an event of default, or upon acceleration. If the deal uses a standstill, the junior payment block should be tied to that mechanism.
- Purchase money security interests and similar permitted liens should be carved out only to the extent they are permitted under the senior facility and do not impair the senior collateral package beyond the agreed exception.
- Bankruptcy-related consent should be drafted to match the intended allocation of rights in a restructuring, including any advance consent to priming financing or other priority treatment, subject to the deal’s negotiated limits.
- Subrogation should arise only after the senior obligations are indefeasibly paid in full, with turnover and assignment mechanics aligned to that endpoint.
- Governing law should ordinarily match the senior loan agreement to reduce interpretive conflict under the contract and in enforcement.
- Use recognized contract construction principles, including plain meaning, defined terms, express precedence provisions, and integration language consistent with New York law or the governing law selected for the facility.
- Where the source package references bankruptcy consent, subrogation, or permitted liens, cite the controlling statutory or contractual authority as drafted in the source materials or as generally recognized in transaction practice.

## 4. Analytical scaffolds

- Start by mapping the debt stack: who is senior, who is junior, what obligations are subordinated, and whether collateral priority, payment priority, or both are at issue.
- Draft a definitions block that separates “Senior Debt,” “Junior Debt,” “Collateral,” “Permitted Liens,” “Default,” “Event of Default,” and any “Payment Block Event” or equivalent trigger.
- Write the payment waterfall in operational steps:
  - what the junior party may receive before a trigger,
  - what must be turned over after a trigger,
  - what happens upon acceleration, enforcement, insolvency, or full repayment.
- Draft the lien subordination covenant separately from the payment subordination covenant so enforcement rights and cash rights do not collapse into one ambiguous provision.
- Align every carve-out to the senior facility’s own permitted-lien framework rather than inventing a parallel list.
- Include the bankruptcy consent language only to the extent the deal requires advance junior consent; preserve negotiated carve-backs if the company asks for them.
- State the subrogation mechanics affirmatively: no subrogation until the senior debt is paid in full, and then only to the extent of remaining claims and rights.
- Add an interpretation section confirming that amendments, waivers, extensions, refinancings, and replacements of the senior facility remain within the protected senior basket if that is the intended bargain.
- Prepare the companion memorandum as an issues-resolution note: identify the contested points, explain the compromise wording, and note any open drafting assumptions.
- Before finalizing, verify that the agreement and memo are both complete, non-empty, and mutually consistent, and that the agreement—not the memo—contains the operative risk allocation.

## 5. Vertical / structural / temporal relationships

- Track the vertical relationship between the debt instruments: senior obligations sit above junior obligations for both payment and collateral priority to the extent the draft says so.
- Track the temporal relationship between pre-default and post-default periods, because payment rights and enforcement rights often change at the trigger date.
- Track the lifecycle relationship between origination, amendment, refinancing, acceleration, insolvency, and discharge; the agreement should say which events preserve senior status and which terminate junior rights.
- If multiple junior instruments exist, state whether the agreement covers one note, a class of notes, or any future permitted junior indebtedness, and keep the scope consistent throughout.

## 6. Output structure conventions

- Draft the subordination agreement as a standalone transactional contract with customary recitals, defined terms, operative subordination provisions, turnover/standstill mechanics, subrogation, bankruptcy consent, amendments, notices, governing law, and execution blocks.
- Use clear section headings that follow industry convention; do not mirror any hidden checklist or rubric wording.
- Use a separate drafting memorandum that explains the negotiated resolutions, identifies any assumptions or unresolved points, and briefly ties each key clause choice to the underlying deal objective.
- If the task calls for files, ensure the primary agreement file is written first and is complete before the memorandum is prepared.
- Keep the agreement internally consistent with the senior facility documents and ensure the memo does not introduce terms that the agreement does not contain.
- End the memorandum with practical next-step recommendations for counsel or the business team, anchored to the signing or closing timeline.