Should You Consider Non-dilutive Funding?

3 Mins read

Should You Consider Non-dilutive Funding?

Why non-dilutive funding is a great option for startups in all stages of development

When you’re a startup, raising money can be a daunting task. You want to make sure you have control to build the business as you envisioned, but you also need the necessary cash flow to fuel your growth.

Trying to master this balance can be a lot of pressure. If you’re in a spot where it’s difficult to find the perfect investor to share your vision, you may want to consider non dilutive funding, which allows you to maintain control of your company.  

What Is Non-dilutive Funding and How Does It Work?

Non-dilutive funding is a type of financing that doesn’t dilute your shares or require your company to provide its own financing. This is compared to dilutive funding, which requires you to give away a piece of your company in order to secure funds. Most traditional venture capital funding works on a dilutive funding model.

Non-dilutive funding means that you maintain control over your company and you don’t have to give up any ownership in order to get the cash flow you need. Non-dilutive funding can come in many different forms, including debt financing, grants, crowdfunding government contracts, tax credits, and many other options.   

How Does Non-dilutive Funding Work?

Non-dilutive funding can work in several ways, depending on the source of your funding. What they all have in common is that they utilize funding that isn’t expected to be directly repaid to the investor through relinquishing ownership, or is only expected to be repaid through shares of future earnings. 

This means that non-dilutive funding can potentially come from sources that are essentially gifted money: grants, tax credits, and crowdfunding all fit into this category. 

Conversely, types of non-dilutive funding that involve an indirect form of repayment include bootstrap funding (the owner is expecting the company to eventually repay the startup costs plus an interest), or non-dilutive funding sourced from capital firms who take repayment from a company’s ongoing revenue.

In this second scenario, non-dilutive funding ties with your future revenue and often offers flexible repayment options – when your revenue goes up, your payment goes up and when your revenue goes down, your payment goes down. 

What Companies Benefit the Most From Non-dilutive Funding? 

Even though non-dilutive funding requires repayment, it is still regularly used by startups in all phases of development and it serves as a way to save otherwise promising companies during times of hardship. There are several situations in which non-dilutive funding may be the most worthwhile.

The most popular reason why startups use non-dilutive funding is to secure funding in between traditional funding rounds. Sometimes, the financial needs of a company outpace what they receive from traditional venture capital firms, and it becomes necessary to secure extra funding quickly. 

This is especially relevant if the company hits a sudden growth spurt and needs immediate cash flow to fuel this growth. If you can’t quickly gain access to the proper amount of cash, you might miss a giant opportunity to grow — or worse, fall backward as a result of your inability to make it to the next step. Non-dilutive funding allows startups to do this during urgent times of need.

Other reasons a startup may opt for non-dilutive funding is if the founder wants to retain full control of the company without relinquishing ownership to an investor, or if the company has revenue but isn’t necessarily profitable yet.

How Do I Find a Good Partner in Non-dilutive Funding?

When you’re considering non-dilutive funding from external sources, it’s important that you find a partner who is committed to helping you grow and can provide flexibility and multiple rounds of funding when needed. 

The exchange of funds should be more than just a transaction — you want to find a company that values the relationship as much as the investment. Selecting established firms who have a track record of doing this, like Novel Capital, is essential for the overall health of your business.

A good partner will provide multiple rounds of funding, understand your needs, and be able to offer other resources in addition to the capital infusion. These extra resources may come in the form of mentorship, connections, or industry expertise, which can sometimes be more valuable than the investment itself.

When you’re seeking out a non-dilutive funding partner, remember that the focus should be on finding someone committed to helping your business succeed in the long run. Do your research and be careful with who you choose as a partner. If you make the right choice, you will be on your way to new levels of growth.