Capital stack

Definition

The layers of money in a deal, ordered by who gets paid back first.

Why It Matters

The order is the whole point, because it decides who absorbs a bad year. The bank sits at the bottom with a lien and gets paid first. The seller note sits above it, usually on standby, so the seller waits while the bank is made whole. The buyer's own equity sits on top and is what disappears if the business is worth less than the debt. Every dollar moved down the stack is cheaper and more dangerous; every dollar moved up costs more of the company. A lender reads the stack to see whether anyone but them is taking real risk.

In numbers: A $1.2M purchase funded by a $900k SBA loan, a $180k standby seller note, and $120k of buyer equity puts 10% of the price in the layer that is wiped out first.