What is the capital stack?
The capital stack is the structure of all capital that is invested into a company. At a high level, this means that the capital stack includes both the equity and the debt invested to date. More specifically, though, this means all types of both equity and debt.
That means both common and preferred equity, and both junior and senior debt. These categories can be further split. You can have different types of preferred equity, for example.
As with anything capital-related, it can definitely get more complicated. Unitranche debt, for instance, is an increasingly popular hybrid loan structure that enables banks and credit funds to have greater flexibility within investments.
That said, it's best to just think of the capital stack as the mix, or map, of a company's financing on an ongoing basis.
Why does the capital stack matter?
Capital stacks are unique to a borrower's industry, financing needs, and stage.
In a previous post, we covered why capital strategy matters. Think of the capital stack as the result of a company's fundraising decisions over time.
In a sense, the capital stack is a zoomed out version of a company's cap table. Just as a cap table shows all of a company's shareholders, a capital stack shows all of a company's equity and debt issuances at a point in time.
You'll often read about a company's capital stack (informally known as a "cap stack") in the context of real estate investing. That's because real estate financing commonly involves both equity and debt. As debt capital grows in popularity, however, you can expect to hear about cap stacks more and more frequently, across all verticals.
How should I think about my company's capital stack?
Your company's capital stack reflects all of your funding decisions to date.
If your company initially raised equity and has since achieved business history or assets that lenders are comfortable lending against, you may have the opportunity to incorporate debt into your capital stack as well. That's often the case for fintech lenders and proptech companies.
Different industries and growth models require different capital strategies. The key is avoiding a capital stack mismatch, or a situation in which achieving business goals still doesn't deliver the returns to equity- and debt-holders that were originally expected.
The way to think about your capital stack is to first identify what you're optimizing for, whether that's growth, low dilution, or risk profile. After that, you can seek out and secure the investments and funding sources that make the most sense for you.
Want to learn more?
If you're interested in learning more about technology that can streamline your debt capital raise and management, just request a demo of Finley here. We'd love to chat!