The capital stack from the founder's side

The stack

A company's capital is the money it has raised and not yet given back. It comes in layers. Each layer has a claim on the company's cash and assets, and the layers are paid in order. The most senior is paid first, in full, before the next receives anything. The ordinary shares are paid last, with whatever is left.

Investors draw it as a stack, with the most senior at the bottom and the most junior at the top. In a normal year the order hardly matters, because there is enough for everyone. It matters in two moments: when the company is sold, and when it cannot pay. In both, the stack decides who gets what.

For a founder the lesson is simple and often learnt late. Every layer above the ordinary shares is paid before you are. Its size, its price and its maturity decide what your shares are worth.

1. Senior debt

The bottom of the stack is senior secured debt: a term loan, sometimes with a revolving facility beside it, secured on everything the company owns. It ranks first. If the company is sold or wound up, the senior lenders are repaid before anyone else.

Because it is safest, it is cheapest. In private credit today, a senior loan to a steady, mid-sized company typically pays 450 to 525 basis points over the base rate, with an upfront fee of one to three points. A bank will charge less for a stronger borrower and lend less. A private credit fund will charge more and lend more.

Senior debt also comes with covenants, a security package over every asset and every subsidiary, and restrictions on what the company can do without the lender's consent: borrow more, pay dividends, sell a business. Most middle-market loans have at least one maintenance covenant, tested every quarter.⁶ For a founder, the covenants matter more than the margin. They decide how much room the company has before the lender is at the table.

A UK dental group's acquisition facility from a private credit fund in 2023 shows a typical shape. It paid 750 basis points over a compounded reference rate for six years. Arrangement fees were about 4.6% of the commitment, and the lender took a debenture over four group companies.¹

2. Unitranche

A unitranche is one loan that replaces two: the senior debt and the layer below it. The borrower pays a single blended rate, and the lenders divide the risk between themselves in an agreement the borrower often never sees.

It is simpler and faster than a stack of separate loans, and it is now the standard way private credit funds lend to companies owned by private equity. It usually costs more than pure senior debt and less than senior plus mezzanine. It also allows more leverage than a bank would, which is why sponsors like it.

3. Mezzanine and second lien

Between the senior debt and the equity sits subordinated debt: second-lien loans, mezzanine loans, holding company notes. It is paid after the senior lenders and before the shareholders. It costs more, often a mix of cash interest and interest paid in kind, and it may come with warrants: the right to buy a small slice of the equity.

Mezzanine fills a gap. A senior lender will lend so much against the company's earnings and no more. If the plan needs more money than that and the owners do not want to sell more shares, mezzanine closes the difference. It is expensive debt, but it is cheaper than equity in a company that succeeds.

The UK dental group above added a £2m mezzanine facility from the same lender a year after its first loan.¹ Many lower mid-market companies do the same: a small, expensive layer to bridge one more acquisition.

4. Venture debt

Venture debt is lending to companies that have raised venture capital but are not yet profitable. It is not secured on earnings, because there are none. It is secured on the company's assets and, in practice, on the expectation that the venture investors will keep funding it.

It typically comes to a fifth to a third of the last equity round.⁴ It costs more than senior debt, often in the low teens, and it comes with warrants. Hercules Capital, the largest listed venture lender, says its warrant coverage "generally ranges from 3% to 20% of the principal amount invested".⁵ For a founder, it is a way to extend the time before the next equity round with less dilution. It must be repaid whether or not that round comes.

5. Preferred equity

Above the debt sits equity, and the first layer of equity is usually preferred. A preferred share has priority over the ordinary shares: it gets its money back first, and sometimes a fixed return as well.

Two terms matter. The liquidation preference says how much the preferred shareholders receive before the ordinary shareholders on a sale. A "1x" preference means they get their money back first. A "2x" means twice their money. Participation means that after taking their preference, they also share in what is left as if they held ordinary shares.

In US venture rounds, these terms have become rare. In the first quarter of 2026, only 2.7% of primary rounds on Carta had a liquidation preference above 1x, and 5.4% had participation.³ In private equity and in growth rounds from non-venture investors, cumulative preferred dividends of 8% to 12.5% are common.

6. Sponsor loan notes

In a UK or European buyout, the private equity firm rarely puts all its money in as shares. Most goes in as loan notes or preference shares carrying a fixed return, typically 10% to 15% a year, which accrues and is paid when the company is sold.

The accounts of UK buyouts show it plainly. When a private equity firm bought a Bury fire engineering company in 2022, it paid £34.9m. That was funded by £17m of bank debt, £18.7m of 12.5% loan notes and £6.6m of 12.5% preference shares. The ordinary shares cost £49,983.²

This structure has a large consequence for management and founders who hold ordinary shares. The loan notes grow at 12.5% a year, compounding. On a sale, they are repaid with all their accrued interest before the ordinary shares receive anything. The ordinary shares are a highly geared bet: worth nothing if the company grows slowly, and worth a great deal if it grows fast.

7. Ordinary shares

At the top of the stack, the ordinary shares own whatever is left. They carry the votes, usually, and all of the upside above the claims beneath them.

The founder's question is not what percentage of the ordinary shares they own. It is what that percentage will be worth after everything beneath it has been paid. A founder with 30% of a company sold for £100m, with £60m of debt, loan notes and preferences ahead, receives 30% of £40m, not 30% of £100m.

Reading your own stack

Draw it. List every instrument the company has issued, from the bank facility to the last share option. For each, write down how much is owed today, how fast that grows, when it must be repaid, and what it can force the company to do. Then work out three numbers.

What the ordinary shares receive on a sale at today's value. If the answer is little or nothing, the shareholders above you are running the company for their own outcome, whatever the cap table says.

When the first maturity falls. The earliest date anyone can demand repayment is the date the company must refinance, sell or negotiate. It should be at least two years away before a new raise.

How much room the covenants leave. Work out how far earnings can fall before the first covenant is breached. In a downturn, that number decides who controls the company.

A new raise changes the stack. Every term a new investor asks for, a preference, a coupon or a covenant, is a claim placed somewhere in it. The cost of the raise includes what the investor's claim does to everyone above it.

Cite as: “The capital stack from the founder's side”, Norvian Review, 15 October 2026.