Non dilutive funding vs dilutive funding
If you thought the title was a lot, just wait until you read this post. While we love ourselves some non-dilutive funding, we get that equity financing has a time and a place.
The idea of this post is to lay out the pros and cons of non dilutive vs dilutive funding and let you decide which one makes the most sense for you.
Let's start with good old equity financing. To briefly recap, equity financing is any type of financing that requires you to trade equity for capital.
Now for the good stuff.
- No repayments - Because you’re essentially trading equity for capital, there is no need to repay the capital provider.
- No revenue needed - Equity financing is not dependent on any sort of revenue or profitability ( unlike most non-dilutive options).
- Larger amounts of capital - Equity financiers generally have larger cash reserves to distribute, therefore increasing the amount you could raise.
- Build important connections - Aside from the money they can offer, equity lenders typically have networks that can be very beneficial to founders.
- Loss of control - With equity financing, you are permanently giving away a piece of your company and thereby losing control.
- Potential conflict - As you add investors and dilute equity, the risk of conflict among them rises as they each take a piece of ownership.
- Competitive fundraising - Raising equity is extremely competitive, as many more companies aim for equity financing as opposed to debt financing. Because funds are limited, investors want to see as many options as possible before committing to any one of them.
- Expensive - The long-term cost of equity financing is far more expensive than debt. Because you are giving away equity, you're also giving away a part of future profits.
Non dilutive funding
While non dilutive funding encompasses funding options like grants and corporate cards, for the sake of this breakdown they will not be included.
Let's break it down.
- No equity dilution - Maybe the best part of debt financing is being able to keep what is yours and never lose control or answer to anyone.
- Cheaper - While debt funding has to be paid back, the overall cost is far less than equity financing as future profits are all yours.
- Tax-deductible - While many people don't know this, businesses can deduct interest payments from their taxes, offsetting the overall cost of financing.
- Leverage - While debt financing requires revenue, it allows you to use your current revenue to leverage larger amounts of capital to power your growth.
- Has to be repaid - Debt always has to be repaid, and while the terms are set beforehand, repayments can eat into profits.
- Harder to qualify for - Because debt lenders are trying to minimize risk, qualifying for debt financing can be harder than equity financing.
- Liability - If your business fails, some lenders require a personal guarantee as a backup which means that you would be personally responsible to repay the lender.
- Warrants/ Covenants - Some lenders include covenants or warrants in your deal which gives them certain rights including purchasing equity.
As stated originally, equity has its place as does debt. Choosing the correct type of financing is important and it will affect the outcome of your goals as a startup founder.
Monthly Revenue is generally a considerable factor in how startup founders (especially from SaaS companies),choose their financing option.
Now that everything has been laid out, we hope that you can make the best decision to fund your business. If some of the terms in this post left you slightly confused, you check our resource center to learn more.