Startup Funding 101: Dilutive Funding vs. Non-Dilutive Funding
There are two main types of startup funding: dilutive and non-dilutive. Essentially, dilutive funding is involves an entrepreneur giving up ownership and control over their company to secure capital—non-dilutive funding is the opposite. Read on to learn more.
Dilutive Funding Defined
Dilutive funding is any type of funding that demands giving up equity. In return for relinquishing shares or other forms of equity of your company, you get liquid capital that can be used to help your business grow. Who provides these types of funding?
A common source of dilutive funding is angel investors. Angel investors are high-net worth individuals who fund startups using their own money.
Many early-stage startup founders prefer angel investors because they are usually less predatory than other forms of funding. Since angel investors tend to invest because they believe in a company’s vision, their support effectively helps foster innovation and growth in startups.
Venture capitalists, or VCs, are another type of investor that provides companies with capital in exchange for equity. Unlike angel investors, they are employed by risk capital companies and invest using other people’s money.
While it is difficult to secure funding from them, they’re typically easier to find than an angel investor. VCs are often used by young companies who need capital to scale and commercialize their products.
Non-Dilutive Funding Defined
Non-dilutive funding is any type of funding that does not require giving up equity of your company. When possible, this is a preferred route for startup founders, as it means retaining ownership and freedom over their company. The following are some examples of non dilutive capital funding.
Bank or SBA loans can be a great option for startups to secure funding without involving new stakeholders. However, they are somewhat hard to qualify for, especially for startups in the early stages.
They often require strong collateral, such as a home or another big asset, good credit scores, and a demonstrated ability to repay the loan. The amount provided also incurs interest.
While grants may not be obtainable for all startups, they’re a great option for those who qualify. Grants are given by government agencies or other organizations to startups who meet certain criteria.
The main requirement, though, is the startup should be working on something that benefits the public good or furthers a specific cause. Grants don’t have to be repaid, and are essentially free money.
Revenue-based financing (RBF) is a type of non-dilutive funding in which company revenue is exchanged for investor capital. This is rapidly gaining traction amongst startup founders, especially thos who are in between rounds of traditional funding.
Offered by financing firms, such as Novel Capital, the funding is typically given as a loan. However, unlike a regular loan, instead of being repaid in installments with interest, it is repaid with a fixed percentage of the company’s revenue.
What type of funding works best for you will depend on your startup, preferences, and stage of growth. When possible, non-dilutive funding has advantages over dilutive, but many startups use a combination of both.