Finance Fundamentals: Access Capital While Retaining Equity Upside

Answering the Core Question: How to Raise Capital Without Giving Up All Your Upside

If you’re a founder, majority owner, or real estate sponsor looking to raise between $5M and $250M in 2025–2026, you’re facing a fundamental tension: you need capital to grow, acquire, or de-risk personally—but you don’t want to hand over control or sacrifice the equity upside you’ve spent years building.

The good news is that you don’t have to choose between “starving the business” and “selling everything.” Today’s private markets offer a spectrum of instruments—from senior debt through preferred equity to minority recapitalizations—that let you access capital while keeping meaningful ownership and participation in future value creation. The trick is understanding which levers to pull, when, and at what price.

Consider a real example from late 2024: a mid-market industrial services company with $12M EBITDA completed a minority recap, selling 35% to a private equity fund while the founder retained 65% and day-to-day control. The founder took $18M off the table personally, the company received $25M for strategic acquisitions, and the deal was structured so the founder still captures the lion’s share of upside at a second exit in 2029–2031. That’s the blueprint this guide will help you build.

By the end of this article, you’ll have a framework to compare structures across the capital stack, practical guardrails on leverage levels and coverage ratios, and negotiation tips to preserve your upside potential through exit.

Capital Stack Fundamentals: Where Your New Money Will Sit

Before you negotiate any term sheet, you need to understand exactly where your new capital will sit in the pecking order—because that position determines who gets paid first, who controls what, and who keeps the upside.

Think of a company or project as a $100M pie. The capital stack divides that pie into layers based on risk and return. Here’s a simplified breakdown:

Senior Debt sits at the top with first claim on underlying assets and cash flows. In 2025, expect pricing of 6–9% for secured bank facilities, with strict covenants and amortization requirements. Senior lenders take the lowest risk, accept the lowest return, and have no equity upside—but they get paid before anyone else.

Mezzanine Debt and Private Credit come next. These subordinated debt instruments typically price at 10–14% (often with PIK interest or small warrant positions). Private debt funds providing this capital accept higher risk for higher returns, but still rank ahead of equity holders in a downside scenario.

Preferred Equity sits below debt but above common equity. Preferred equity investors expect 12–18% returns (often including an equity kicker or conversion rights). They get their preferred return and capital back before common shareholders see a dime—but after all debt obligations are satisfied.

Common Equity bears the most risk and captures the most upside. Common equity investors and common equity holders receive whatever remains after everyone else is paid—which can be substantial in a successful exit, or zero in a failure.

Here’s what this means in practice across key dimensions:

• Repayment Priority: Senior debt first, then mezzanine/private credit, then preferred equity positions, then common equity

• 2025 Cost of Capital: Senior debt 6–9%, mezzanine 10–14%, preferred equity 12–18%+ with upside participation

• Dilution Impact: Debt = none, mezzanine with warrants = minimal, preferred equity = moderate, common equity = direct

Since 2023, tighter bank underwriting—lower LTV and LTC ratios, stricter covenants, more conservative interest coverage requirements—has widened the gap between what senior lenders will provide and what deals actually need. Private credit, preferred equity, and minority private equity firms have rushed to fill that gap. Understanding where each instrument sits in the stack is essential for preserving both direct control and future upside potential at exit.

Non-Dilutive and Less-Dilutive Options: Debt and Private Credit

The first step to keeping upside is maximizing appropriately structured debt and private credit before you sell common equity. Every dollar of debt financing you can responsibly layer in is a dollar you don’t need to give up ownership for.

Senior Secured Bank Debt

Traditional bank debt remains the cheapest capital in the stack. For middle-market companies in 2025, expect banks to stretch to 2.0–3.5x EBITDA depending on industry, cash flow stability, and underlying collateral quality. For stabilized real estate, senior debt typically covers 55–65% of value (LTV).

Bank covenants have tightened since central banks raised rates aggressively in 2022–2023. Expect requirements like:

• Interest coverage ratio of 2.5x or higher

• Maximum leverage covenants with step-downs

• Quarterly financial reporting and compliance requirements

Banks pull back quickly when they sense trouble—which is why the next layer matters.

Unitranche and Direct Lending

Direct lending from private debt funds has exploded over the past decade. These lenders—often arms of larger institutional investors or standalone private funds—provide “unitranche” facilities that blend senior and junior debt into a single tranche with blended pricing.

Typical tickets range from $25M to $300M. Pricing runs higher than bank debt (often SOFR + 500–650 bps, or 10–12% all-in), but the trade offs include:

• More flexible covenants and amortization

• Faster execution and less bureaucracy

• Willingness to stretch on leverage (3.5–5.0x EBITDA in some cases)

For many mid-market companies seeking growth capital, unitranche is the sweet spot between cheap-but-rigid bank debt and expensive-and-dilutive equity.

Mezzanine Debt

Mezzanine debt sits subordinated to senior loans and often includes features like PIK interest (paid-in-kind, meaning it accrues rather than requiring cash payments) plus small warrant positions that give lenders a taste of equity upside.

Target returns for mezzanine providers typically fall in the low-to-mid teens. A typical structure might be 10% cash interest plus 3% PIK plus warrants for 2–5% of fully diluted equity. That small warrant position minimally dilutes founders while preserving the vast majority of equity upside.

Example: A $50M revenue industrial manufacturer needed $40M for an acquisition. Instead of selling 30% of equity to a private equity fund, the company raised $25M in senior debt and $15M in mezzanine from a private credit fund. The mezzanine included 3% warrants—leaving the founder with 97% ownership versus 70% had they gone the equity route. When the company sold three years later at a higher EBITDA multiple, the founder captured dramatically more proceeds.

The Risk Factor

Over-leverage is the silent killer of equity upside. In 2025–2027, with interest rates elevated and refinancing windows uncertain, you need to stress-test aggressively:

• Maintain interest coverage above 2.0x under realistic downside scenarios

• Model refinancing at 200–300 bps higher than current rates

• Avoid bullet maturities clustering in 2026–2027 when market conditions remain unpredictable

Debt preserves upside only if you can service it through a cycle.

Structured Equity: Preferred Equity, Minority Recaps, and Hybrid Solutions

Structured equity bridges the gap between straight debt and common equity. It lets owners draw capital today while postponing or limiting dilution—and often preserving participation in future value creation events.

Preferred Equity Explained

Preferred equity investments function like equity on the balance sheet but with debt-like return characteristics. Key features include:

• Liquidation preference: Preferred equity holders get their capital back before common shareholders in any exit or liquidation

• Preferred return: Typically 8–12% for lower-middle market deals, accruing and compounding until exit

• Upside participation: Often through equity kickers, conversion rights, or a share of proceeds above a certain return threshold

For founders, preferred equity is less dilutive than selling common shares outright—but only if you understand the preference math. A 1.5x participating preferred, for instance, can eat significantly into your exit proceeds in a modest outcome.

Minority Private Equity Recapitalizations

Selling 20–40% of your company to a private equity fund or family office lets you take substantial cash off the table while retaining majority ownership and upside into a second exit.

Here’s a typical timeline:

1. 2026: Owner sells 35% stake to PE fund at $80M enterprise value, receives $20M personal liquidity, company receives $15M growth capital

2. 2027–2030: Company executes growth plan using PE operational resources and additional debt for strategic acquisitions

3. 2031: Full exit at $200M enterprise value; owner’s 65% stake is now worth $130M versus the $52M it would have been worth at the original valuation

The math works because you’re trading a minority piece today for resources to grow the total pie—then capturing majority ownership of a much larger outcome.

Hybrid Structures

The most sophisticated deals blend instruments:

• Preferred equity plus small common co-invest: Investor puts in $20M as 10% preferred plus $5M for 15% common—aligning incentives while protecting downside

• Debt plus detachable warrants: Lender receives warrants exercisable at a premium, giving them upside participation without requiring current equity issuance

• Seller notes plus earn-out: In acquisitions, founders roll equity and accept deferred payments tied to performance, enabling investors to access capital at closing while retaining future upside potential

Comparing Your Options

How do these structures compare for an owner seeking $25M of capital?

Pure Common Equity Sale (40% stake): Owner retains 60%, receives $25M today, participates in 60% of future upside. Full dilution immediately.

Preferred Equity ($25M at 10% pref): Owner retains 100% common, receives $25M today, but preferred holders get their money back plus accrued return before owner sees exit proceeds. Owner keeps full upside above the preference hurdle.

Minority Recap (25% common sale): Owner retains 75%, receives $25M today, participates in 75% of future upside. PE partner brings operational resources and potential for larger exit.

The right choice depends on your risk tolerance, growth trajectory, and how confident you are in your ability to significantly increase enterprise value before exit.

Real Estate Focus: Accessing Capital While Keeping Sponsor Promote

Real estate sponsors and developers face a unique challenge in 2024–2026: higher base rates and reduced senior loan proceeds have fundamentally changed capital stacks. Where a multifamily construction loan might have covered 70–75% of cost in 2021, today you’re often looking at 55–65% LTC from senior lenders.

That gap has to come from somewhere—and preferred equity has emerged as the primary solution for sponsors who want to maintain their promote structures.

How Preferred Equity Works in Real Estate

Preferred equity in real estate sits behind senior debt but ahead of common JV equity in the capital stack. A typical 2025 multifamily development might look like:

• Total Project Cost: $50M

• Senior Construction Loan (60% LTC): $30M

• Preferred Equity (20% LTC): $10M

• Sponsor + LP Common Equity (20% LTC): $10M

The preferred equity provider—often institutional capital from pension funds, insurance companies, or specialized real estate lending platforms—receives a preferred return (typically 10–14% in today’s market) and return of capital before common equity holders see any distributions.

Protecting the Promote

Here’s why this matters for sponsors: the traditional promote structure—where sponsors receive 20–30% of profits above a preferred return hurdle despite contributing only 5–10% of equity—remains intact with preferred equity. The preferred gets paid its contractual return, then the promote kicks in for the sponsor.

Contrast this with raising additional LP equity: every dollar of additional common equity from LPs dilutes the sponsor’s promote. Preferred equity preserves the asymmetric upside that makes development economics work for sponsors.

Preferred Equity vs. Mezzanine Loans

Both fill the same gap in the stack, but they differ in critical ways:

Mezzanine debt is a loan, typically secured by a pledge of the borrower’s equity interest. In distress, mezzanine lenders can foreclose on that equity. Intercreditor agreements with senior lenders govern standstill periods and cure rights.

Preferred equity is an equity investment with contractual priority rights. In distress, preferred equity holders don’t foreclose—they take control of the entity or force a sale. This can give sponsors more flexibility in workouts but also means preferred investors have longer notice periods and more complex remedies.

Key negotiation points include:

• Control rights upon missed preferred payments

• Cure periods and extension options

• Exit timing and liquidity needs alignment

• Treatment in refinancing scenarios

A 2025 Case Example

Consider a multifamily developer in Austin pursuing a 250-unit ground-up project:

• Total Cost: $55M

• Senior Construction Loan at 60% LTC: $33M at SOFR + 350

• Gap to Fill: $22M

Option A: Raise all $22M from common equity LPs

• Sponsor contributes $1.1M (5% of common)

• Sponsor promote on $22M of LP equity

• If project sells at $70M, sponsor takes perhaps $3M after promote

Option B: Layer in $12M of preferred equity at 12% pref return, raise $10M from LPs

• Sponsor contributes $500K (5% of reduced common)

• Preferred investors get $12M + accrued return at sale

• Remaining proceeds flow through promote structure

• If project sells at $70M, senior debt gets $33M, preferred gets ~$14M (with accrued return), remaining $23M flows through promote—sponsor may take $4M+ despite smaller personal investment

The preferred equity structure preserves sponsor economics while unlocking liquidity from the capital stack.

Risk, Control, and Governance: Protecting Your Downside and Your Say

Access to capital always trades off with control and governance. In 2024–2025, investors across private markets have become more protective—demanding stronger rights, tighter covenants, and clearer remedies. Understanding these dynamics is essential to maintaining control while enabling investors to participate in your upside.

Control Levers in Equity and Quasi-Equity Deals

Every capital provider wants some say in how their money gets used. Common control mechanisms include:

• Board seats: Private equity firms typically require at least one board seat in minority deals, sometimes two or a board observer

• Veto rights: Major decisions—asset sales, additional debt, executive hiring, capex above thresholds—often require investor consent

• Financial covenants: Leverage ratios, coverage tests, and liquidity minimums that trigger additional reporting or control rights if breached

• Step-in rights: Provisions allowing investors to assume operational control if performance slips below agreed thresholds

Who Has What Rights in Distress?

The capital stack determines who can do what when things go wrong:

Senior lenders have the strongest remedies: they can accelerate loans, foreclose on underlying assets, and force sales. Their covenants are typically the tightest.

Mezzanine and private credit providers can foreclose on equity pledges but usually face standstill periods (90–180 days) during which senior lenders have priority.

Preferred equity holders can’t foreclose in the traditional sense but can often take voting control of the entity, replace management teams, or force a sale process after defined cure periods.

Minority common shareholders typically have tag-along rights (the right to sell alongside a majority sale) and sometimes drag-along obligations (the requirement to sell if majority owners accept an offer above certain thresholds).

Provisions That Can Hurt You

Several terms can dramatically alter founder and sponsor outcomes:

• “Bad leaver” provisions: If you leave the company under unfavorable circumstances (terminated for cause, departure before a vesting cliff), you may forfeit unvested equity or be required to sell at book value rather than fair market value

• Anti-dilution protection: Full-ratchet anti-dilution for preferred investors can crush founder ownership in a down round

• Participating preferred: Unlike standard preferred (which converts to common at exit), participating preferred takes its liquidation preference AND participates in remaining proceeds—potentially claiming 60–80% of exit value in moderate outcomes

• Uncapped preferences: Accruing preferred returns without a cap can compound to consume all common equity value if an exit takes longer than expected

A Cautionary Example

Imagine a software company that raised $15M of preferred equity at a 12% compounding preferred return in 2021, expecting to exit by 2024. Market conditions shifted, and the exit didn’t happen until 2027. By then, the preferred had accumulated to $30M. When the company sold for $45M, the preferred took $30M, leaving only $15M for common equity holders—despite the company’s actual value creation. The founders, holding 70% of common, split just $10.5M on a $45M exit.

Non-Negotiables for Preserving Upside

If you want to retain meaningful future upside potential, hold firm on these points:

• Maintain majority voting control regardless of economic ownership percentages

• Cap cumulative preferences at a reasonable multiple (1.5–2.0x) to prevent runaway compounding

• Avoid uncapped participating preferred—insist on non-participating or capped participation

• Negotiate reasonable cure periods and step-in thresholds that account for market volatility

• Ensure management incentive plans (option pools, carried interest) are sized appropriately post-investment

Valuation, Timing, and Market Conditions (2024–2026)

Macro conditions since 2022—aggressive rate hikes, a slower IPO market, and cautious bank lending—have fundamentally reshaped valuation and term negotiations in private deals. Understanding this environment is critical to making smart capital decisions.

Why Acting in 2025 May Beat Waiting

Many investors and founders are waiting for the “perfect market” to raise capital or sell. But waiting carries its own risks:

• Interest rates may remain elevated through 2026–2027, keeping capital costs high

• Public markets remain unpredictable for exit windows

• Growth without capital may mean losing ground to better-funded competitors

• Asset values in real estate have already adjusted—waiting for 2021 valuations may mean waiting forever

A disciplined minority stake sale or structured capital raise in 2025 at a realistic valuation often beats waiting for an uncertain future.

Valuation Approaches Across Asset Classes

Valuation methodologies vary by sector:

• Traditional businesses: EBITDA multiples (typically 5–8x for lower-middle market industrial and service businesses)

• SaaS and technology: Revenue multiples (3–8x depending on growth rate and retention), increasingly combined with rule-of-40 analysis

• Real estate: Cap rates on stabilized NOI (5–7% for multifamily in major markets), or cost-plus-margin for development

Importantly, structure and valuation interact. Investors may accept a higher headline valuation if they receive stronger preferences, additional layer of governance rights, or priority returns. Founders should think about effective valuation—what they actually receive in various exit scenarios—not just the number in the press release.

Blended Cost of Capital Thinking

Rather than fixating on the cost of any single instrument, sophisticated founders and sponsors think in terms of blended effective cost of capital. A capital stack combining:

• $30M senior debt at 8%

• $15M preferred equity at 14% (with modest equity participation)

• $5M common equity

…may have a blended cost around 10–11%, preserving substantial upside for existing common shareholders compared to raising $50M of straight common equity at implied 25%+ IRR expectations from investors.

Scenario Comparison: Two Paths to Exit

Path A: Sell 60% of company today at $50M valuation

• Founder receives $30M for 60% stake

• Founder retains 40% worth $20M at current valuation

• Total founder position: $50M

Path B: Raise $15M preferred equity today, grow aggressively, sell 60% in 2030 at $150M valuation

• Preferred (with accrued return) takes $22M at exit

• Remaining $128M distributed to common

• Founder’s 100% of common = $128M

• Minus taxes and time value, but NPV of founder proceeds substantially higher

The numbers will vary based on your specific situation, growth trajectory, and risk tolerance. But the principle holds: patient capital that preserves ownership can dramatically outperform early dilutive sales if you execute well.

Practical Playbook: How to Design a Capital Raise That Preserves Your Upside

Here’s a step-by-step checklist translating everything above into an actionable process for 2025–2026.

Step 1: Diagnose Your Capital Need and Growth Plan

Before talking to any capital provider, get clear on what you actually need capital for:

• Organic growth: Working capital, hiring, product development

• M&A: Acquisitions, platform roll-ups, strategic acquisitions

• Project financing: Real estate development, equipment, infrastructure

• Personal liquidity: De-risking, diversification, estate planning

Each use case points toward different optimal structures.

Step 2: Map Your Current Capital Stack and Realistic Debt Capacity

Work with your CFO or advisor to understand:

• Current leverage ratios and interest coverage

• Available capacity under existing credit facilities

• Realistic incremental debt capacity (stress-tested at higher rates)

• Uncalled capital from existing investors or commitments

Many companies seeking growth capital discover they can borrow more than they thought—particularly those with stable cash flows and quality underlying assets.

Step 3: Define Your Control and Dilution Red Lines

Before negotiating, know your non-negotiables:

• What board composition are you willing to accept?

• What decisions require your approval regardless of ownership percentage?

• What’s the maximum dilution you’ll accept to common equity?

• What governance rights are dealbreakers?

Step 4: Decide Your Target Mix

Based on your needs, capacity, and red lines, determine your ideal capital structure:

• Maximum debt consistent with safe coverage ratios

• Amount of preferred or structured equity needed to fill gaps

• Any common equity you’re willing to sell

Step 5: Run a Competitive Process

Don’t accept the first term sheet. Approach multiple potential partners:

• 2–3 senior lenders (banks, credit unions, regional lenders)

• 3–5 private credit or direct lending funds

• 3–5 private equity or family office investors for minority stakes

• 2–3 preferred equity providers if applicable

Competition improves terms and reveals market pricing.

Step 6: Model Downside Scenarios Before Signing

Before closing any deal, stress-test:

• What happens if EBITDA drops 20%?

• What if interest rates rise another 200 bps at refinancing?

• What if exit takes 2 years longer than planned?

• What do founder proceeds look like in a mediocre outcome versus a home run?

Key Metrics to Track Post-Deal

Maintain ongoing visibility into:

• Leverage ratios (Debt/EBITDA)

• Interest coverage (EBITDA/Interest)

• Liquidity (cash plus availability under facilities)

• Projected common equity value at target exit dates (2029, 2031, etc.)

Do’s and Don’ts

Do:

• Engage advisors with deep expertise in private credit and minority recapitalizations

• Stress-test 200–300 bps rate shocks in all scenarios

• Negotiate structure and governance as hard as valuation

• Keep refinancing optionality open for 2027–2029

• Think about your second exit, not just this transaction

Don’t:

• Over-lever into a 2026–2027 refinancing cliff

• Accept uncapped participating preferred without understanding downside math

• Rush a process because one investor created artificial urgency

• Ignore covenant flexibility—you need room to operate

• Forget that general partners and management teams need aligned incentives

Frequently Asked Questions: Capital Access and Equity Upside

This FAQ distills common founder and sponsor questions from real 2023–2025 deals. Each answer provides practical guidance with specific numeric ranges and realistic timelines.

Is preferred equity really less dilutive than selling common?

Yes, but with important caveats. Preferred equity doesn’t dilute your ownership percentage—you still own 100% of common. However, preferred holders get paid before you in any exit. If your exit is only modestly above the preference stack, common equity holders may receive very little. Preferred is most beneficial when you have high conviction in substantial value creation—the higher the exit multiple, the more the math favors preferred over selling common upfront.

How much control do I lose if I sell 30–40% to a PE fund in a minority recap?

Less than you might fear, but more than zero. Most minority private equity deals include board representation (typically 1–2 seats on a 5–7 person board), consent rights over major decisions (large acquisitions, debt incurrence, executive changes), and information rights. Day-to-day operational control typically remains with founders. The key is negotiating clear thresholds—what dollar amounts trigger consent requirements—and ensuring management team incentives remain aligned. Many founders find the right partner adds strategic value that outweighs governance friction.

What is a realistic total leverage level in 2025 for my industry?

It varies significantly. Asset-heavy manufacturers and distributors can often sustain 3.0–4.0x Debt/EBITDA with predictable cash flows. Software companies with recurring revenue may access 4.0–6.0x from specialized lenders. Real estate depends on asset class—stabilized multifamily supports 60–70% LTV, while development projects typically cap at 55–65% LTC for senior debt. The critical constraint isn’t leverage itself but interest coverage: maintain at least 2.0x coverage under stressed scenarios to avoid liquidity risk.

Can I refinance expensive preferred equity later with cheaper debt?

Often yes, but timing matters. Many preferred equity agreements include call provisions or refinancing windows after 2–3 years. If your company grows and de-risks, you may be able to refinance 12–15% preferred with 8–10% debt. However, refinancing typically requires either significant value creation (reducing the preference as a percentage of enterprise value) or extended hold periods. Build realistic refinancing assumptions into your original planning—don’t count on a 2027 refi if market conditions remain challenging.

How do I balance portfolio diversification with maintaining control of my primary asset?

This is the core tension for concentrated founders. Minority recaps and dividend recapitalization strategies let you unlock liquidity for personal portfolio diversification while maintaining control of the operating business. The key is structuring liquidity needs realistically—enough to create meaningful personal diversification without over-leveraging the business or selling so much equity that you lose alignment with future value creation.

For comprehensive guidance on building your capital strategy, return to the Practical Playbook section above and work through each step systematically.

Conclusion: Balance Liquidity Today with Equity Optionality Tomorrow

In today’s market, owners and sponsors don’t have to choose between “starving for capital” and “selling everything.” The private markets offer a sophisticated spectrum of instruments—senior debt, mezzanine, preferred equity, minority recapitalizations—that provide liquidity today while preserving meaningful participation in tomorrow’s value creation.

Three principles should guide every capital structure decision:

1. Avoid over-leverage that can wipe out equity – Cheap debt only helps if you can service it through a full cycle. Stress-test coverage ratios at higher rates and lower EBITDA before signing.

2. Negotiate structure and governance as hard as valuation – A higher headline number means nothing if participating preferences, control provisions, or regulatory changes consume your proceeds at exit. Understand the math in downside scenarios.

3. Prioritize partners with track records through full cycles – The right partner—whether senior lender, preferred equity investor, or private equity fund—has seen long term growth and downturns. They’ll structure deals that work for both sides across market conditions.

Think beyond this transaction to your second exit or recap in 2030–2032. The capital structure you build today should position you to capture that future sale at optimal outcomes—not just solve this year’s funding gap. Design your deal so you meaningfully participate in the value you’ll create over the next five to seven years.

The founders and sponsors who master these finance fundamentals don’t just access capital—they build generational wealth while maintaining control of the businesses and projects they’ve built. That’s the real upside worth preserving.

This article is provided for general information only and does not constitute financial, investment, legal, tax, or regulatory advice. Views expressed are necessarily high-level and may not reflect your specific circumstances; you should obtain independent professional advice before acting on any matter discussed.

If you would like support translating these themes into practical decisions - whether on capital structuring, financing strategy, risk governance, or stakeholder engagement - Bridge Connect can help.

Please contact us to discuss your objectives and we will propose an appropriate scope of work.