Non-Dilutive Funding 101 Founders Guide: A Recipe for Success

 

 

"I don't have the time to hunt for venture capitalists, and I need to raise money for marketing right away. Plus, I can't afford to give away any more equity to investors."

If that's your trail of thought as a founder, non-dilutive funding may be a much-needed solace for you. We've seen founders get distraught trying to find the right funding option, all while they end up exchanging short-term gains for long-term losses. In a race where competitors seem to be getting ahead with funds galore (with investors taking away a chunk of the profits), what other options do entrepreneurs have?

Read on to know more about how non-dilutive funding can be a viable option in such win-lose scenarios and, more so, how it can set you up for success!

Non-dilutive funding: what is it, though?

Non-dilutive funding is a type of financing where companies get to hold on to their equity and retain complete ownership of their business. This means that founders can escape the grip of skewed equity bargains without any fear of losing control over business decisions.

In contrast, dilutive or equity funding requires entrepreneurs to give up shares of the company. Traditional venture capital is dilutive funding, meaning that founders must carefully consider the types of investors they bring on board and be prepared to give up some ownership and decision-making powers in the company.

Most often, dilutive funding is what cuts the chase to TV headlines- it's big, bold, and garners more attention.

While dilutive funding options like angel investors and VCs do seem lucrative options for founders, it's important to assess the need and size of the company and then choose the finding option accordingly.

The rule is simple: giving up something now shouldn't cost you more later.

Dilutive funding vs non-dilutive funding: What's the funda?

DILUTIVE FUNDING	NON-DILUTIVE FUNDING
Dilutive funding involves giving up your company's shares in exchange for capital, for example, by approaching an angel investor or venture capitalist.	Non-dilutive funding involves not giving up ownership of your company at all. This could be in the form of bank loans or revenue-based financing.
Giving away equity means giving away a portion of your future profits. This is why dilutive funding can get expensive along the road.	Considering that all future profits are yours, non-dilutive funding is a more cost-effective option in the long run.
Dilutive funding is independent of revenue.	Non-dilutive funding allows you to use your current revenue and build up capital to scale.
It does not require repayment, so is a viable option in early stages.	Debt financing demands repayment at a later stage. Moreover, options like subscription-based financing via platforms like BridgeUp only serve companies with at least 12 months of generated revenue.

Non-dilutive funding: the different types

A few common examples of non-dilutive funding include grants, crowdfunding, family or bank loans, product royalties and licensing, tax credits, venture debt, annual recurring revenue lending, structured equity products, and subscription-based financing.

Discussed below are the most sought-after types of non-dilutive funding:

1. Loans: Indebted, not forever 

Loans are a type of funding without equity dilution, in that banks lend money to the founders at a specified interest rate. Banks, online lenders, non-banking financial institutions, and credit unions all offer loans.

However, there's a catch- most banks require a strong credit score, collateral, or a good track record to allocate sufficient funds.

2. Grant awards: No repayment needed

Grants are monetary awards given by the government, a company, or a foundation to help businesses achieve certain goals or to encourage performance. Grants don't need to be repaid, and they don't solicit the dilution of equity either.

However, there’s a downside to exercising this option: there's usually a lengthy application process and high competition involved in securing a grant. Usually, grants are awarded by governments, trusts, foundations, and corporations to potential companies.

3. Crowdfunding: A dime a dozen

Crowdfunding is when small amounts of capital are pooled in by a large number of individuals — eventually enough to fund a business venture. The donation, debt, or reward-based crowdfunding paves the way for people to invest in your company in a non-dilutive manner.

Kickstarter, GoFundMe, and Indiegogo are a few well-known crowdfunding platforms.

4. Opt for licensing

Would other companies pay a licensing fee to use your products or services? Licensing could come in handy as a non-dilutive funding option in such cases.

An example of licensing in action is TV ads featuring well-known cartoon characters, the makers of which get paid by sponsors.

5. Tax credits: Reduced tax to the rescue

A tax credit is a form of non-dilutive startup funding that reduces the tax bill at the state, local, or federal level by a predetermined percentage. Tax credits can be of 3 types:

• Refundable: A refundable tax credit is one that is refunded to the taxpayer, irrespective of the taxpayer's liability.
• Non-refundable: A non-refundable tax credit means that the taxpayer gets a refund only up to the amount he owes.
• Partially refundable: A partially refundable tax credit provides up to a certain amount of credit as a tax payment.

6. Factoring: With seller, buyer, and factor

When a company sells its invoices or a portion of its accounts receivable to a factoring company, the transaction is known as "factoring."  This fee is higher than what you'd pay for a standard line of credit (1-3% for every 30 days overdue), but factoring can help businesses (that don't meet the criteria of traditional banks) gain access to capital.

7. Venture Debt: the capital injection

Venture debt is a type of non-dilutive funding for companies in the early stages of growth. It's essentially a loan offered to companies that have raised money from VCs.

Venture debt is a plausible option to use in tandem with dilutive funding options, as it allows for more cash injection with no equity dilution, thus solidifying the company's long-term financial strength.

8. Subscription-based financing: Scale faster, scale better

What if there was a way to get access to capital instantly but without any loss of ownership or securing of collateral? That's where Subscription Based Financing comes in.

Unlike loans or venture debt, platforms like BridgeUp do not take any warrants, collateral, personal guarantees or charge any interest. Only recurring revenue is treated as tradable assets.

After all, why should you bother with equity dilution or high-interest rates when it’s entirely avoidable, right?

Non-dilutive funding: Is it good for me? 

Non-dilutive startup funding is attractive to start-up owners- primarily because owners have complete control over their business. No more venture capitalists, angel investors or other foreign investors exercising control over your company - isn't that a boon in itself?

Moreover, all future profits are undiluted and safe, solely the property of the company. Investors are less likely to demand excessive returns from non-dilutive capital, allowing business owners to negotiate more reasonable funding terms.

Potential investors who aren't interested in diluting the company's ownership value look for companies with a strong track record of success and growth potential. Needless to say, non-dilutive funding options allow for growth and must be assessed based on your needs.

Who should consider non-dilutive funding?

• Entrepreneurs who want to retain complete control of their ventures and grow on their own terms
• SaaS (software as a service) companies, e-commerce, D2C subscription services, Edtech, and other domains, owing to their business models.
• Companies who need instant cash inflow for their digital marketing expenses
• For reasons like introducing a new product, expanding into a new market or delaying major funding by retaining the valuation.
• Founders who have given up plenty of equity and now wish to raise capital through non-dilutive measures

The bottom line

It's simple to understand why non-dilutive finance is becoming increasingly popular among founders. With instant cash advances, entrepreneurs can focus on long-term growth while preserving complete ownership of their company.

If you'd like to explore the founder-inclined possibilities of subscription-based financing, we, at BridgeUp, would be happy to help! Feel free to call us at +91-9819660287 or drop us a query on this form here.

Related Resources

• Difference between Debt Financing and Equity Financing
• Top 7 differences between angel investors and venture capitalists
• What is an Angel Investor?
• Power of non-dilutive financing
• What is Venture Debt? A complete guide to Venture Debt 2022
• The Ultimate Guide to Non-Equity Capital Funding?