TL;DR: The capital stack is the full picture of how a company is financed (every layer of debt, equity, and hybrid instrument, ranked by priority in the event of a liquidation or exit). The position of each layer in the stack determines its risk, return, and claim on assets. The cap table is a sub-set of the capital stack.
The capital stack represents all of the financing a company has raised, organised by seniority (who gets paid first if the company is wound down or sold). At the top sit the most senior, lowest-risk instruments (typically secured debt). At the bottom sits common equity, which is the last to receive proceeds but benefits most from upside if the company succeeds.
A simplified capital stack for a growth-stage company might look like this:
Venture debt is senior secured debt, it sits at the top of the capital stack with a first-lien security interest over the company's assets, including intellectual property. In an exit or wind-down, senior lenders are repaid before preferred equity holders and common shareholders.
This seniority is what allows venture debt lenders to accept lower returns than equity investors while taking on meaningful risk. For founders, it means the debt has real priority, but it also means lenders are typically repaid in full from exit proceeds before founders and investors see returns.
Flow Capital takes a first-lien senior secured position over all assets, including IP and cross-guarantees from subsidiaries.
Each layer of the capital stack affects subsequent financing rounds, as well as potential returns to other existing layers of the stack. A company with significant senior secured debt may find it harder to add more debt, since new lenders would rank behind existing ones. Equity investors look at the capital stack to understand the liquidation waterfall, how much of the exit proceeds will flow to them versus debt holders.
For founders, the key question when adding any instrument to the capital stack is: what does this do to my ownership, my flexibility, and my ability to raise the next round?
Does venture debt always sit at the top of the capital stack? In most venture debt structures, yes. Lenders take a first-lien senior secured position. In some cases, venture debt may be subordinated to a bank facility, in which case it sits below the bank but above equity.
Can a company have both venture debt and bank debt? Yes, though it depends on the terms of each. Some venture debt lenders are willing to subordinate to an existing bank line; others require a first-lien position. Larger companies can often have multiple layers of debt, while smaller companies usually have only one lender.
How does the capital stack affect founders at exit? Exit proceeds are distributed in order of seniority. Senior debt is repaid first, then subordinated debt, then preferred equity (with liquidation preferences), then common equity. Founders holding common shares receive proceeds after all senior claims are satisfied. It is important for founders and future investors to understand the implications the existing cap stack has on ownership and returns in various scenarios.
What is a liquidation preference? A liquidation preference gives preferred equity holders (typically VC investors) the right to receive a minimum return before proceeds flow to common shareholders. It is distinct from debt, which has a fixed repayment obligation regardless of exit size. A liquidation preference is often described in multiples of the initial investment. A 2x liquidation preference means the holder receives a minimum 2x return on the investment, even if it takes proceeds from subordinated layers in the capital stack.
Related terms: Dilution
