You’ve probably heard this line before: “It’s not what you sell your company for — it’s what you keep.”
And it’s absolutely true.
At Legacy Advisors, we’ve helped dozens of founders navigate exit planning, and one of the most overlooked — but incredibly impactful — aspects of a successful deal is capital structure.
Your capital structure doesn’t just determine ownership percentages. It defines your economic destiny when it’s time to sell.
It determines:
- Who gets paid, when, and how much
- What happens if there’s an earnout, escrow, or re-trade
- Whether or not the founder has any leverage at the table
- How much upside is retained for future value creation
In this article, I’ll break down how to think about capital structure as part of your exit strategy — not just when raising capital, but from day one of company building all the way through the final wire transfer.
What Is Capital Structure?
At its core, capital structure is how your company is financed and who owns what.
It includes:
- Equity ownership (founders, employees, investors)
- Preferred vs. common stock
- Debt and convertible notes
- SAFE instruments and warrants
- Vesting schedules and option pools
- Redemption preferences, liquidation rights, and participation clauses
Each of these elements plays a role in how exit proceeds are distributed — and in how power dynamics play out during M&A.
Why Founders Often Ignore Capital Structure Until It’s Too Late
Founders typically focus on three things: product, revenue, and team.
That’s the right focus operationally. But when it comes time to sell, all of that success gets filtered through your capital stack.
“We sold for $50M!”
“Amazing! How much did you get?”
“…uh, about $4.2M after the prefs, note conversions, and escrow.”
Sound familiar?
That’s not a made-up scenario — I’ve seen this happen many times. Which is why in The Entrepreneur’s Exit Playbook (available here), I go deep into how smart capital structuring — early and often — can make or break your exit.
Understanding the Buyer’s View of Your Cap Table
Buyers (especially financial sponsors) analyze capital structure because:
- It signals potential complexity post-close
- It reveals founder alignment and incentive
- It impacts how proceeds are allocated
- It drives deal timeline (cleaner = faster)
A messy or unclear capital stack slows everything down — and often forces last-minute cleanup that can delay or derail the deal.
Key Capital Structure Considerations for Exit Planning
Let’s break this down into what matters most for founders:
1️⃣ Equity Ownership and Dilution
Know exactly who owns what.
- Founders
- Early employees
- Advisors
- Angel investors
- Institutional VC
- Option holders
- Warrants
Misaligned expectations here can cause serious issues. I’ve been in deals where a forgotten SAFE note holder resurfaced weeks before close, holding the deal hostage.
Founders should maintain an up-to-date cap table with full documentation from the beginning.
2️⃣ Preferred Stock & Liquidation Preferences
If you’ve raised outside capital, chances are your investors have preferred shares.
These often come with:
- 1x–2x liquidation preferences (they get their money back before anyone else)
- Participating rights (they get their money back and share in the upside)
- Cumulative dividends
- Anti-dilution protections
Each of these terms affects who gets what when the deal closes.
Founders who don’t understand how these stack up may be shocked at how little they walk away with after a solid exit.
3️⃣ Debt and Convertible Notes
Debt adds a layer of complexity — and sometimes risk.
- Senior debt gets paid first
- Subordinated debt may have conversion rights
- Convertible notes often become equity pre-close
- SAFE instruments can dilute founders more than expected
We always advise founders to model multiple exit scenarios well in advance to see how these instruments play out in different valuation outcomes.
4️⃣ Option Pools and Vesting
Buyers care deeply about who will stay post-close.
Your equity incentive plan should align with long-term value creation — not just short-term salary.
Key questions:
- Are your options properly documented?
- Have they been granted and accepted?
- Is vesting tied to meaningful performance or just time-based?
- Are change-in-control provisions clearly spelled out?
Mismanaged option pools often become deal friction zones, especially when employees feel they were promised more than what they’ll receive at exit.
5️⃣ Founder Alignment
If founders are massively diluted — or stuck with poor terms — buyers know motivation post-close may be low.
Strong buyers want founders who are still meaningfully economically aligned — or who can transition out cleanly without drama.
Clean cap tables with clear economic incentives drive faster deals and better terms.
The Clean Capital Stack Advantage
Founders with clean, simple capital structures enjoy:
- Faster diligence
- Higher buyer confidence
- Fewer surprises in legal review
- Lower escrow and earnout pressure
- Clearer alignment with employees and co-founders
That’s why at Legacy Advisors, we help founders review and optimize capital structure 12–18 months ahead of a potential exit.
Case Study: Capital Structure Cleanup = $3M More for the Founder
We advised a founder with ~$30M revenue and ~$5M EBITDA looking to sell to a strategic.
Initial cap table showed:
- Two SAFE notes with variable caps
- 3 angel investors with loosely documented side letters
- A small convertible note with interest accrual
- Unvested employee options with no clear schedule
We spent four months:
- Converting SAFEs to fixed equity
- Clarifying investor preferences
- Documenting option grants
- Simulating payout waterfalls
When buyers engaged, the process was smooth — and the founder received $3M more than expected simply by controlling the equity narrative upfront.
Planning for Escrow, Earnouts, and Waterfall Scenarios
Capital structure planning isn’t just about ownership — it’s also about how payouts flow.
- Who absorbs escrow deductions if issues arise?
- How are earnouts split among shareholders?
- Are option holders included in performance incentives?
- What happens if reps & warranties are triggered?
Founders need to define economic waterfall models that map out every possible exit scenario — from base case to upside.
This is how you avoid post-close surprises, legal disputes, or employee resentment.
The Role of Capital Structure in Deal Structure
Buyers use your capital stack to determine:
- How to price the deal
- Who needs to sign what
- How to structure payment (cash, stock, earnout)
- What obligations survive post-close
Messy cap tables invite:
- Lower upfront cash offers
- More structure (e.g. earnouts or holdbacks)
- Slower closing processes
- More expensive legal bills
Clean structure = clean deal.
The Private Equity View on Capital Stack Discipline
PE funds care deeply about capital stack clarity because:
- Their LPs demand it
- Their lawyers flag everything
- Their lenders require clean payout models
- Their post-close teams need clear equity incentive plans
The more buttoned-up your structure is, the easier it is for a PE firm to model and close your deal — and the more likely they’ll compete to win it.
Founder Mindset Shift: From Growth to Equity Engineering
Founders often think:
“As long as the company’s growing, we’re in good shape.”
That’s a strong operating principle.
But when it comes to exit, think:
“Growth gets you the valuation. Structure determines what you take home.”
This is a wealth creation shift.
Your capital structure is not an afterthought — it’s your exit amplifier or exit limiter.
Tools We Use at Legacy Advisors
When planning capital structure pre-exit, we build:
- Fully detailed cap table audit (including side letters, notes, warrants, etc.)
- Exit scenario modeling (base, target, upside)
- Pro forma payout waterfalls
- Option and incentive equity assessments
- Term cleanup roadmaps (SAFE conversions, note rewrites, etc.)
It’s surgical, and it’s worth every second.
Guidance from The Entrepreneur’s Exit Playbook
In The Entrepreneur’s Exit Playbook, I dedicate a full section to equity and capital engineering for this reason: you can do everything right in company building — product, team, market, revenue — and still lose millions on exit if your capital structure is broken.
You owe it to yourself to build with the end in mind.
Final Thoughts
Your capital structure is the lens through which your exit will be interpreted.
Smart founders engineer not just a great business — they engineer a clean, investor-ready, buyer-friendly equity structure that maximizes:
- Control during diligence
- Leverage during negotiation
- Cash at close
- Alignment post-close
Because a great exit doesn’t just come from growth. It comes from structure.
And the time to build that structure is not when buyers show up — it’s right now.
Frequently Asked Questions About Planning Your Capital Structure to Maximize Exit Outcomes
What is capital structure, and why does it matter when selling a company?
Capital structure refers to how your company is financed and who owns which pieces — including common and preferred equity, debt instruments, convertible notes, SAFEs, and employee options. In an M&A context, capital structure defines who gets paid what and when. It matters because it directly affects how exit proceeds are distributed, how buyers perceive complexity or risk, and how much control you have during deal negotiations. As Kris Jones emphasizes in The Entrepreneur’s Exit Playbook, a poorly structured or undocumented cap table can erode deal confidence, slow timelines, and cost founders millions — even in high-value exits.
How do liquidation preferences impact the founder’s payout in an exit?
Liquidation preferences give certain investors (typically preferred shareholders) the right to receive their investment back — often with a multiple — before anyone else, including founders and common shareholders. For example, if your Series A investor has a 2x liquidation preference on a $5M investment, they receive $10M before proceeds are distributed to others. This can drastically reduce the founder’s final payout if the exit value isn’t significantly higher than the total preference stack. Understanding and modeling these preferences early helps founders prepare for realistic outcomes and negotiate better terms in future funding rounds.
When should a founder start planning their capital structure for an eventual exit?
Founders should begin planning capital structure from the moment they raise their first dollar — but it becomes especially critical 12–24 months prior to a potential exit. This is the window where it’s still possible to clean up SAFEs, convert notes, clarify option grants, fix documentation issues, and prepare pro forma payout models. Buyers will want to understand exactly how proceeds flow to each stakeholder. Starting early prevents legal delays, valuation disputes, and last-minute surprises that can stall or kill deals. At Legacy Advisors, we view capital structuring as a key pillar of M&A readiness.
What role does employee equity play in capital structure and exit success?
Employee equity (usually in the form of options or RSUs) helps retain key team members and incentivize performance. However, it becomes a point of scrutiny during M&A because:
- Buyers want to know who stays post-close
- Misaligned or undocumented option plans raise red flags
- Vesting, acceleration, and payout mechanics must be clear
If employees feel unclear or misled about their exit upside, it can cause morale issues — or even legal disputes. Founders who clearly communicate option structures, refresh vesting schedules, and model employee participation in the deal are far more likely to retain team buy-in throughout the process.
How does capital structure influence the actual deal structure (cash, earnout, escrow)?
A clean, well-defined capital structure makes it easier for buyers to move forward with cash-heavy, low-structure offers. On the flip side, a messy structure — with unknown noteholders, disputed option pools, or uncertain preferences — invites buyer caution. That typically results in:
- More earnouts (contingent payouts)
- Larger escrows (held-back funds)
- Longer reps and warranties
- Delayed closings
Your capital stack tells buyers how simple or risky your deal will be. As Kris Jones shares in Legacy Advisors strategy sessions, a clean cap table creates clarity, and clarity creates competition — which drives up both valuation and founder take-home.