Capital Stack Design: how to fund the next 24 months without boxing yourself in

Capital Stack Design: Funding 24 Months Without Losing Flexibility

Raising money isn’t just about closing a round—it’s about designing a capital stack that balances control, risk, and optionality for the next two years. The best founders:

• Match capital to risk: Use equity for discovery, debt for repeatable cash flows, hybrids for bridges.
• Buy time, not headlines: Each raise is a runway to proof, not a trophy.
• Keep optionality & simplify governance: Avoid terms that block future rounds or hide vetoes.
• Sequence intelligently: Take cheaper, lighter instruments first; save restrictive ones for last.

The Tools and When to Use Them

• Equity: Standard priced preferred; patient but dilutive.
• Convertibles/SAFEs: Fast to close, defer pricing—watch cap table overhang.
• Venture Debt: Works with stable churn and margins—mind covenants, warrants, and serviceability.
• Revenue-Based Financing: Flexible but expensive for lumpy sales.
• Bank Lines/Non-Dilutive Sources: Lowest cost, but need discipline and reporting.
• Tokens/Warrants: Separate from equity; disclose calendars and rights clearly.

Sequencing a 24-Month Plan

1. Map milestones—three proof points tied to quarters.
2. Model cash & sensitivity—30-month view with ±20% revenue/spend and covenant stress tests.
3. Structure the stack:
   • Q0–2: Primary round or capped SAFE; reserve 10–15% for options.
   • Q2–6: Add venture debt if metrics support it.
   • Q6–8: Layer grants or partner co-funding.
   • Q9–12: Prep next priced round or a clean bridge note.

Term Sheet Points That Matter

• Equity: Valuation mechanics, pro-rata rights, board composition, liquidation prefs (1× non-participating as standard).
• Convertibles/SAFEs: Set cap and discount fairly; track MFN and maturity.
• Venture Debt: Right-size draw schedules, covenants you can meet, and model worst-case months.
• RBF: Simulate payback under slow scenarios; avoid stacking risk.
• Tokens: Separate token rights from equity and comply with jurisdictional rules.

Diligence & Modeling Must-Haves

• Clean, current cap table, debt summaries, and revenue recognition memo.
• SOC 2 plan or incident log for security.
• Runway math, dilution view, Rule of 40 path, and covenant headroom sanity checks.
• Avoid red flags: hidden liens, conflicting notes, covenant breaches, or unplanned token unlocks.

Execution Rhythm

Week 1: Define milestones, cash model, and two stack strategies.
Week 2: Clean data room, prep term summaries, align board rights.
Week 3: Soft-circle equity lead, negotiate debt only after equity interest.
Week 4: Finalize docs, rehearse diligence, set weekly cash/KPI updates.

What to Show in Your Deck

One slide each on capital plan, governance, and risk/mitigations, plus a dated footer for market claims.

Why This Matters

A clear stack and cadence shrink diligence loops and protect flexibility—especially in today’s slower, selective funding climate.