Executive Summary
Founders treat the capital stack like a spreadsheet. Boards treat it like a control system. The board is right.
The mix of debt, equity, covenants, liquidity terms, and control provisions determines what you can do when conditions tighten—long before you feel "in trouble."
The capital stack writes your operating rules. Choose wisely.
The Capital Stack Writes Your Operating Rules
When you raise capital, you are not only buying runway. You are accepting constraints, decision rights, time pressure, and narrative risk.
That package becomes the real constitution of the company.
When you raise capital, you are not only buying runway. You are accepting:
- Constraints - covenants, reporting requirements, approval thresholds
- Decision rights - board consent, protective provisions, veto powers
- Time pressure - maturity walls, refinancing risk, liquidity cliffs
- Narrative risk - down rounds, valuation resets, signal degradation
That package becomes the real constitution of the company.
The Founder Mistake: Treating Capital as Fuel Only
Fuel helps you go faster. Rules determine whether you can turn.
A founder-friendly stack is not "cheap money." It is money that preserves:
- Optionality - room to pivot without consent
- Credibility - clean cap table for next round
- Decision velocity - ability to act without approval loops
- Resilience - buffer for diligence and audit scrutiny
- Board approval required for routine hiring
- Monthly financial reporting with 5-day turnaround
- Debt covenants tied to trailing EBITDA
- Anti-dilution provisions that compound
- Liquidation preferences exceeding 1x
- Participation rights that distort economics
The Governance Standard
The international governance benchmark (OECD Principles) is clear: transparency, accountability, and board responsibility are not optional features. Capital structure decisions become governance decisions because they change incentives and oversight.
When founders optimize for "cheapest capital" without considering governance implications, they're optimizing for the wrong variable.
Capital Stack as Risk Management
The capital stack is your first line of defense against volatility. Consider two scenarios:
Scenario A: All Equity
- No covenants
- No maturity risk
- Maximum dilution
- Lowest governance friction
Scenario B: Heavy Debt
- Tight covenants
- Maturity pressure
- Minimal dilution
- High governance friction
Neither extreme is optimal. The right mix depends on:
- Business model predictability
- Growth trajectory
- Market conditions
- Management capability
What Sophisticated Boards Evaluate
When reviewing a capital stack, boards ask:
- Flexibility - Can we adjust course without breaching covenants?
- Optionality - Do we have multiple paths to liquidity?
- Alignment - Are investor incentives aligned with long-term value?
- Defensibility - Can we explain this structure in diligence?
The Diligence Lens
Buyers and investors scrutinize capital structure for:
- Hidden control provisions
- Unclear liquidation waterfalls
- Conflicting investor rights
- Refinancing cliffs
- Covenant complexity
Clean capital structures accelerate transactions. Messy ones create friction, discount valuation, or kill deals entirely.
Conclusion
If your capital stack forces you to "perform for the next round," your strategy is no longer the strategy. The stack is.
Design capital structure with the same rigor you apply to product roadmaps. The consequences last longer.
