Defense tech Series B rounds increasingly use participating preferred

Yanne Capital says participating preferred showed up in 29.8% of U.S. defense tech Series B rounds in the first half of 2026, far above the broader market’s 11.6% rate. The firm says the sector’s funding boom is being shaped more by investor terms, board control and capital stack structure than by valuation.

Why it matters: - Defense tech founders are getting capital on harder terms, which can reduce what they actually keep at exit. - Yanne Capital says the key risk is not headline valuation, but how preferred stock, liquidation preferences and board control affect the waterfall. - The firm estimates those structural terms can leave founders with 15% to 25% less proceeds than a clean-terms comparable at a median exit.

What happened: - Yanne Capital published an H2 2026 research paper on the defense tech capital stack and its structural asymmetries. - Participating preferred appeared in 29.8% of U.S. defense tech Series B rounds in the first half of 2026. - That compares with 11.6% across the broader U.S. Series B market. - Yanne Capital says the defense tech funding boom has been misread as a pricing story when it is actually a terms story.

The details: - Defense tech venture funding reached $40.1 billion globally across 626 deals in 2024, more than triple the $12.8 billion raised across 354 deals in 2019, according to PitchBook Q1 2026. - Headline valuations in defense rounds continue to track within 10% of broader-market medians. - Yanne Capital says the divergence sits in preferred stock mechanics and board composition. - Senior liquidation preferences above 1x appeared in roughly 19% of defense rounds, versus 4% in the broader market, according to Cooley GO Q4 2025 Venture Financing Report. - Investor-majority boards appeared in 66% of tracked defense Series B rounds, compared with 41% in the broader Series B cohort. - Yanne Capital expects the fully booked 2025 print to land within 8% of 2024 by deal count and within 12% by capital deployed. - Sovereign and quasi-sovereign vehicles from allied jurisdictions accounted for roughly 14% of capital deployed into U.S. defense tech Series B and C rounds in 2025. - Those checks typically ranged from $15 million to $50 million. - Venture debt and growth credit appeared in roughly 18% of U.S. defense tech growth rounds in 2025. - Yanne Capital projects that share will rise to 35% to 40% by the end of 2027. - Credit is now functioning as a real layer of the stack, not just a bridge instrument. - The number of funds able to lead a $50 million or larger defense round with full conviction has narrowed. - Multi-instrument stacks combining a strategic-financial lead, a sovereign or quasi-sovereign co-investor and a venture debt facility are becoming the default for rounds above $30 million. - A multi-instrument raise typically takes 14 to 18 weeks from process open to definitive signing. - A single-lead equity round usually takes 8 to 12 weeks. - Yanne Capital says the extra time reflects a stack that can improve founder economics at exit by 5% to 7% of equity at the median modeled outcome. - The paper includes a Defense Capital Stack Diagnostic, a 90-minute exercise for founders to model five term-sheet line items across three exit values and identify the two highest-leverage terms for counter-offer.

Between the lines: - The capital is still available, but fewer investors control the most important decision points. - That concentration gives lead investors more room to demand terms that protect downside without changing the headline valuation much. - Yanne Capital says founders who benchmark only on pre-money valuation are missing the real economics of the deal. - The firm also sees the LP mix shifting, with sovereign capital becoming a more important swing check in defense rounds.

What's next: - Yanne Capital expects participating preferred rates in defense Series B rounds to hold near current levels over the next 12 months. - The firm projects sovereign participation will expand to 18% to 20% of Series B and C capital. - Venture debt is expected to move further into the mainstream of the defense funding stack. - Alex Ozdemir, managing partner at Yanne Capital, said founders who close on headline price but lose exit proceeds to structure have not raised well.

The bottom line: - In defense tech, structure is now carrying as much weight as valuation.