Non-Dilutive Capital vs. Dilutive Capital

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What is Non-Dilutive Capital?


To simply put it, non-dilutive capital is any type of funding that does not require you to sell any equity shares of your company. This allows you to keep full ownership of your business. Non-dilutive capital can come in the form of debt, grants, or donations from your friends and family. For many startup founders, non-dilutive capital is often the catalyst to get their business in full operation. 


What is Dilutive Capital?


Dilutive capital is a type of funding that requires you to give up some equity or a piece of company ownership. This often comes in the form of venture capital and angel investments, which is a popular route of fundraising, especially for technology startups with high growth potential. 


Which Kind is Best for Me?


There are a few factors to consider if you should fundraise with non-dilutive capital or with dilutive capital. 


Do I Want to Forego Company Ownership?


This is a real concern for many entrepreneurs, and many of them are not willing to give up any equity at all to fund their business. Foregoing enough ownership could indicate that you no longer have any decision making power for your own company. You would not experience this if you funded your business solely with non-dilutive capital. With dilutive capital, especially if you are using venture capital or angel investments, it’s possible to give investors upwards of 25% of company ownership in a single round. 


How Fast is My Company Growing?


Generally, angel investors and venture capitalists invest high growth startups with possible unicorn potential. It’s easier for these types of companies to justify using dilutive capital to fund their business since these are typically early-stage startups with very little assets or revenue. With this goal, they are generally limited to selling equity shares to investors. 


On the other hand, there are hundreds of companies who do not have that same growth goal, but still fill a need in the market and have a meaningful user base. A lot of these entrepreneurs do bootstrap their companies, which allows the growth to be slower naturally. However, they can qualify for extra funding using non-dilutive capital while keeping their same growth goals, or if they want to accelerate their growth slightly.


What are Some Non-Dilutive Options?


As mentioned before, non-dilutive capital can come in the form of debt, grants, and donations. Debt is a very broad category for non-dilutive capital, and its options can vary greatly depending on your need. Some common examples of debt include business loans, credit cards, lines of credit, accounts receivable financing, and cash advances. Each option functions differently, so if you would like to learn more about each debt financing option, then read this post here.


Grants are a sum of money from either the government or another organization to fund a specific purpose. Receiving grants typically requires you to submit an application or participate in competitions to pitch your business. There are several grants out there specifically for underrepresented groups like minorities and women, and certain industries. If you want to read more about grants and how to apply for one, then read this post here.


Donations from your friends and family is an informal way to receive non-dilutive capital. Founders usually do this when they first start the company to get it off the ground, so it’s not a particularly sustainable way to fund your business. However, it is great for founders who plan on bootstrapping their startup at the very beginning to give them an extra cushion of funding.


Why Founders are Choosing Non-Dilutive Capital More and More


While VC and dilutive funding can be ideal for some startups, the process takes a lot of time, can be limited to only specific types of companies, and is ultimately very costly. Non-dilutive capital is relatively cheap, and alternative forms of funding is available for most businesses. It is also not unusual for startups to have raised venture capital in the past and raise a non-dilutive round in the future, such as revenue based financing. Doing this can lower your overall cost of capital, while not giving up equity for you and your previous investors. There are startups that do the reverse and raise a non-dilutive round first to save an equity round in the future. 


Choosing non-dilutive capital opens up the option to cater your exit strategy. With dilutive capital, your investors are expecting a certain return with a clear exit strategy. If you plan on selling your business in the future, you may be limited with certain investors who may veto the idea of selling if it goes against their capital return expectations. With non-dilutive capital, that decision becomes largely up to you. You can also continue to operate if you please and not feel pressured to sell your company because of certain investors. Dilutive capital has its perks with mentorship from investors and strong connections in a booming industry, but with non-dilutive capital, the power remains with the entrepreneur.


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