Reply To: What is a capital stack?

#4158
Damocles
Moderator

    Dear BlessedTess

    Don’t feel stupid. It’s not a term often used outside of finance.

    A capital stack refers to the layers of capital that fill a budget and made available for expenditure. Equity is one type of capital and debt is another.

    Each of these are classes of asset that are offered to investors.

    For example, equity is typically in the form of shares that carry rights over the company and involves an investment agreement. Debt is typically in the form of a loan to the company and involves a loan agreement or some other legal instrument.

    In the context of a film budget, the typical capital stack would include a minority (say 30%) of equity capital from shareholders in the rights company, then senior debt of say 30% secured by production rebate certificates, 25% senior debt secured by pre-sales agreements, 10% corporate debt secured against shares in the rights company and 5% “gap” finance (unsecured debt).

    Debt is generally considered lower risk than equity but provides advanced knowledge of what the return on investment should be and can be secured or even guaranteed. Equity generally offers more potential return on investment but is higher risk with little or no security beyond the value of the shares.

    Your introducer is seeking to understand which investors she can bring in for which layers in the capital stack. Investors will have different appetites for the risks and rewards being offered.

    Hope that helps.