How to design a capital stack that works
WeWork's story is worth keeping in mind as we talk about capital stack design because it's the clearest modern example of what happens when a business maximizes financing without maintaining any margin for error:
At its 2019 peak, WeWork had accumulated $18 billion in borrowings and committed to $2.2 billion in annual office lease payments. All while never achieving a single dollar of operating profit. When the IPO collapsed and investor confidence evaporated, there was no cushion, no flexibility, and no room to adapt.
The company filed for bankruptcy in 2023, and what had been a $47 billion equity valuation was reduced to essentially nothing.
The capital stack not only limited WeWork’s options, but it actually predetermined the outcome. So how do you design a capital stack that actually works?
(And doesn’t lead to a near-guaranteed failure like the one that brought WeWork down?)
Start with OPM and let equity be the plug
OPM (other people's money) is a term I use in The Value Equation that encompasses borrowings, leases, and other financing that funds your business without requiring you to deploy your own equity. When you design a capital stack, the right sequence is to determine how much OPM is available first, on what terms, and then treat equity as the remainder.
Whatever the business investment requires beyond what OPM can responsibly fund is your equity number.
This sequencing matters. Leaders who skip straight to equity often over-invest their own capital unnecessarily, while leaders who ignore OPM leave real value on the table.
The goal is to get as much OPM working for you as possible while keeping the payment burden manageable.
Here's what that looks like across the different layers of a typical capital stack:
Long-life assets like real estate and heavy equipment can usually support longer-term financing with lower annual payments. The key number to watch is the payment constant which is your annual payments divided by borrowing proceeds. The lower the payment constant, the more breathing room you have. Leasing rather than owning is another way to access strong OPM proceeds while keeping that constant low.
If your business carries significant inventory or receivables, asset-based lending lets you borrow against those assets on an interest-only basis which is a relatively affordable form of OPM.
And if you're acquiring a business, seller financing often beats everything else thanks to generous repayment terms, low payment burden, and no bank approval required.
Beyond those, senior borrowings from banks and non-bank lenders fill the next layer, followed by mezzanine financing for businesses that need to push the advance rate further.
Both carry higher costs than secured financing, but both have a role in a well-structured stack.
Convertible notes and preferred equity add further tools for situations that require more creative solutions.
Don’t underestimate the need of margin for error
Maximizing OPM is only half the job. The other half (the half WeWork ignored) is making sure the payments don't consume you when things don't go to plan.
Think of margin for error in two ways:
1. The first is cash flow coverage. A healthy business typically generates free cash flow – after all costs, including salaries, maintenance, and capital expenses – of around 1.5 times its annual OPM payment obligations.
That ratio means sales could drop meaningfully before the business can no longer service its debt. The right coverage target for your business depends on how volatile your revenue realistically gets, but 1.5 to 1 is a reasonable baseline to work from.
2. The second is liquidity. This is where business leaders most commonly talk themselves out of something they need. Cash feels unproductive. It sits there, not generating returns, while other uses of capital seem more attractive. But cash is insurance.
It covers the unexpected maintenance bill, the customer who pays late, the supplier who tightens terms, the quarter that simply doesn't go as planned. None of those scenarios are uncommon…they all happen to real businesses.
Yes, holding more cash increases your total business investment, which means you need more OPM and equity to fund it, and that modestly reduces your current returns. But the protection it provides, and the strategic flexibility it preserves, is usually worth more than what you give up.
Unused credit lines work similarly. They carry a cost, but they give you access to liquidity without requiring cash to sit idle permanently.
Liquidity is both protection and opportunity
There’s one more consideration worth exploring when it comes to designing a capital stack that supports your business and that is liquidity. A business with strong liquidity can not only survive bad conditions, but also act during them.
If we look at Amazon, Apple, Meta, Alphabet, and Berkshire Hathaway who collectively held more than $750 billion in cash and short-term investments at the end of 2024, we can understand strategic capacity.
The ability to move on an acquisition, expand into a new market, or absorb disruption without diluting equity or begging for financing at the worst possible moment.
This only works if you can see your capital stack as a lot more consequential than a financing technicality. It's one of the most important strategic decisions every business leader makes because, unlike most operating decisions, a poorly designed capital stack is very hard to unwind once it's in place. Build it right from the start, and it becomes the foundation that lets everything else grow.
Build it wrong, and even a good business can end up like WeWork: a compelling idea that ran out of runway because the numbers were never designed to survive.
If you’re here to become business rich without all the missteps, you’re in the right place. Follow along as we explore more in my book The Value Equation, and through The Value Equation YouTube channel.
