Non Dilutive Funding
What is non-dilutive funding?
Non-dilutive funding is a financing tool businesses can deploy to fund their operations. Non-dilutive funding differs from dilutive financing options in that the business is not giving up equity (diluting their ownership) in exchange for capital.
How does non-dilutive funding work?
When a company raises capital it comes via equity, debt, or a combination of both. Equity-based capital is dilutive funding and it entails the issuer obtaining a percentage of the business’ share capital (common or preferred) upfront or as a right to exercise down the road. Non-dilutive funding is the opposite - the cost of this financing is only interest income or fees payable from the issuee to the issuer for borrowing the capital. The structure of non-dilutive capital varies but the key distinction is that firm’s who access this form of financing are not pledging any of its share capital.
What are some examples of non-dilutive funding?
- Loans (term loans)
- Forgivable loans from friends and families
- Grant Awards
- Tax Credits
- Revenue Based Financing / Recurring Revenue Lending
- Lines of credit
- Merchant cash advances
- Invoice factoring
- Term loans
- Equipment loans and financing
What companies are a good fit for non-dilutive funding?
Non-dilutive funding is a viable funding alternative for startups looking to maintain complete control over their holdings and operating compass. Maintaining a tight grip on equity and cap tables can allow a company to be even more strategic around capital raising at later stages of their venture and help to curb share dilution as the company groups.
What are the typical use cases for non-dilutive funding?
- Runway extension
- Working capital
- Growth capital
How much capital can a company receive from non-dilutive funding?
This depends on the business that is financing the capital, but funding is typically advanced as a multiple of a business’ revenue (0X-1X annual revenue). Arc will advance up to 80% of a business’ annual recurring revenue (not sure if this is something we want to reveal but putting here in case).
What does non-dilutive funding cost?
Non-dilutive funding is typically assessed based on the all-in cost of the interest rate and the fees associated (origination fee, unused fee, prepayment fee). Banks such as Silicon Valley Bank with lower risk profiles will lend in the high single digits to low double digit annual percentage rates but will often take fees and warrants (dilution). Alternative institutions such as Arc will be low double digits and higher due to the higher risk of the businesses. Some institutions can lend at very expensive rates often eclipsing 40%-50% on an effective annualized basis (OnDeck, Kabbage, Lighter Capital).
When does it make sense to look at non-dilutive funding?
Non-dilutive funding makes sense for all businesses because founders should always want to maintain equity! It is especially important for entrepreneurs that have already experienced dilution or that believe the equity is highly valuable and therefore the cost of giving up that equity equally as high.
Dilutive vs Non-Dilutive funding?
The distinction between the two funding methods sounds exactly like what it sounds like -
Dilutive funding refers to any kind of fundraising that requires you to give up ownership of your company. This is by far the most common and sensationalized way for startup founders to get access to capital. We often hear of budding tech incumbents raising capital at record setting valuations or drawing in top name investors.
What are the top providers of non-dilutive funding?
Arc Technologies, Lighter Capital, Pipe, CapChase, Timia, BigFoot, Kabbage, OnDeck
What are the benefits of non-dilutive funding
Unlocks optionality for the future
Keep more of your ownership stake
Since equity isn’t a term in the financing equation, founders get to keep more of their business despite taking on outside funding. Giving up an ownership stake isn’t necessarily a bad thing, this investment vehicle allows companies to attract investors with deep subject-matter expertises to further enhance the trajectory of a business. In addition to taking a slice, the right investors can extend the overall size of the pie – substantially extending the size of your business and further increasing the market opportunity.
In the event of an upside, equity becomes increasingly more tangible [and valuable]. The ownership stake a company gives up isn’t fully observed until an actual liquidation event. Startup operations give up substantial ownership and control over a company’s direction when they choose to accept capital from outside investors.
[insert example of an ownership valuation piece]
Maintaining operational excellence
Once founders have paid back the initial loan the extent of their business obligation to their creditors is effectively null. Not giving up equity means your business has more autonomy to operate the way you want to and on your terms. Founders aren’t necessarily tied to a form of conduct and free to operate according to their preset values and standards. This can include raising capital through additional vehicles including VC funding, revenue-based financing, or even taking out another loan to help fuel their next stage of growth.
What are the drawbacks of non-dilutive funding?
Because the cost is in interest and fees and not simply equity there are actual cash payments that need to be made from the issuee to the issuer. This can impact cash flow.
Understanding the true cost of capital
When leveraged correctly, cash injections can have a significant impact on a businesses’ trajectory. Well timed capital injections could be effectively to extend a startup’s runway or give a company the much needed push to invest into another strategic arm for their business
Startup founders and operators may discount the true costs of capital associated with each funding alternative. In most cases, debt funding ends up being the cheaper alternative. Startup equity isn’t just tied to dilution, it's intricately tied to a company’s vision and the operational flexibility to run your business the way you want to without significant red tape.
If you’re looking for more information that correctly breaks down the tradeoff between traditional equity financing and debt, check out Arc’s Cost of Capital Calculator.