Most conversations about startup funding focus on one thing: how much to raise. How much runway you need, how much dilution you’re willing to take, how much you can justify at your current traction. All valid questions. But there’s another question that matters just as much and gets far less attention – what type of capital are you raising, and from where?

That’s what a capital stack is about. Understanding it won’t just make you sound sharper in investor conversations. It’ll help you make smarter decisions about how to structure your raise and avoid commitments that complicate things later.

What is a capital stack?

A capital stack is the full picture of how a business is funded – every source of capital, in order of who gets paid first if things go south. Think of it as layers, stacked from the most secure at the bottom to the most risky (but most rewarding) at the top.

For a startup, the capital stack typically includes some combination of ordinary equity, preferred equity, convertible instruments like SAFEs or convertible notes, and potentially debt. Each layer has different rights, different risk profiles and different return expectations.

The layers – and what they mean

Ordinary equity sits at the top of the stack in terms of risk, which means it’s last in line if the company is wound up. As a founder, your shares are ordinary equity. So are most employee share options. Ordinary shareholders take on the most risk but benefit most from a successful exit.

Preferred equity is what most institutional investors hold after a priced round. It comes with additional rights – things like liquidation preferences, anti-dilution protections and sometimes the right to convert to ordinary shares. A 1x non-participating liquidation preference, for example, means the investor gets their money back first in a sale before ordinary shareholders see anything. The terms here matter a lot and are worth understanding before you sign.

SAFEs and convertible notes sit in an interesting middle ground. They’re not equity yet – they’re instruments that convert into equity at a future priced round, usually at a discount or with a valuation cap. They’re common at pre-seed and seed stage in Australia because they’re faster and cheaper to execute than a full priced round. But they do add a layer of complexity to your cap table and can affect how a future lead investor prices your round.

Debt sits at the bottom of the stack – meaning it gets repaid first in a wind-up scenario. It’s the most secure from a lender’s perspective, which is why it tends to carry lower returns. For startups, debt is most commonly seen as venture debt (usually available post-Series A) or R&D financing drawn against a tax incentive claim.

Why the structure matters

The order of the stack determines who gets what in an exit – and how much is left for founders and ordinary shareholders. A heavily layered cap table with multiple liquidation preferences and accumulated interest on convertible notes can mean that even in a solid exit, founders and early employees see very little.

It also affects how future investors look at your business. A clean, simple cap table makes due diligence faster and gives a new investor confidence that there aren’t hidden obligations or complex terms lurking underneath. The messier your stack, the harder that conversation becomes.

Understanding the stack also helps you make better decisions about when to use debt versus equity. If your startup has strong, predictable revenue and you need capital to grow, venture debt might let you extend your runway without further dilution. But taking on debt too early – before revenue is consistent – adds pressure you may not be able to handle.

Think about this before you raise, not after

The time to think about your capital stack is before you’re deep in a raise, not when a term sheet is on the table and you’re trying to understand what you’ve agreed to. Know what instruments you’ve issued, what rights attach to each and what a future investor will see when they look at your cap table.

If you have SAFEs outstanding, model what they convert to at different valuations. If you’ve taken on debt, understand when it’s repayable and what triggers accelerate it. The founders who know their capital structure cold are the ones who negotiate better terms and close rounds with fewer surprises.

Not sure how your capital structure is set up?

At Standard Ledger, we help Australian startups get clarity on their cap tables and capital structure – whether you’re preparing for your first raise or heading into a Series A. Get in touch and let’s take a look at where things stand.