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Startups fund their future endeavors through dilutive or non-dilutive funding. These terms cover a variety of methods for obtaining cash to fuel a startup’s growth.
Dilutive funding, including capital you might receive from venture capitalists (VCs) and angel investors, requires you to give away a portion of your company in exchange for the funds. You might have to share percentages of future profits or release some decision-making control to the investors willing to open their checkbooks for you. In this way, your stake in the company is “diluted” because you’ve ceded some equity or control to other parties.
Other ways of securing dilutive funding include selling stock in your company or using convertible notes to bring in cash now while you defer the dilution to a later date.
Non-dilutive funding, on the other hand, allows you to secure additional funds without relinquishing any portion of your business to someone else. You can’t receive the money for free, however, so non-diluted funding usually comes from debt issued by a bank or another loan holder, such as vendor debt financing.
If you need to fund your startup but are not interested in handing over profits and control to your investors, you might want to take a closer look at some non-dilutive choices.
These are the most common types of non-dilutive funding you may encounter.
Before you can decide on what’s best for your company, you need to understand each of the non-diluted financing options.
Bank loans
If you’re willing to take on payments with interest, bank loans are a straightforward way to obtain funding that doesn’t dilute your control.
However, while you might find a financial institution willing to take a chance on your growing business, it likely won’t be easy. Most banks will hesitate to issue loans to startups without proven cash flow.
Interest-free cash sources
You could look for donors, grants, and tax credits, or even accept gifts from family members as other forms of non-dilutive capital. These options are typically interest-free, so you should take advantage of them if possible. However, this type of funding option typically won’t cover all your financial needs.
Non-traditional lenders
Many startups partner with non-traditional lenders (or a startup-friendly bank such as Silicon Valley Bank) instead of trying to obtain a loan from a traditional bank.
A non-traditional lender, such as a venture-debt fund, provides cash to your company in exchange for debt you can repay later. This is a great way to extend your runway, giving your company the time and financial support it needs to get off the ground.
Typically, these funds come with high interest rates, so they’re not without drawbacks. But paying back the loan with interest might still be a better plan than diluting your stake in your own company or having to bend to the wills of your investors if they disagree with some of your decisions.
If you choose to pursue non-dilutive capital from a non-traditional lender, read the loan terms carefully. Some lenders try to ask for equity in addition to the interest. Requiring equity financing defeats the purpose of avoiding dilutive options.
Pipe
If your company has recurring revenue streams, but you need cash now, you can explore non-dilutive financing from Pipe in exchange for sending them your future recurring revenue. This type of revenue-based financing quickly gives you the boost in cash flow that you need upfront with minimal restrictions.
Zeni’s expert finance team can answer your questions and help clear up confusion about funding your startup.
Securing funds for a startup isn’t always simple or easy. No one knows this better than Zeni, because we were once a startup just like yours — and we’ve worked with startups from the beginning.
When you’re focused on getting the cash to keep your early-stage company afloat, you don’t have the time or capacity to worry about figuring out how to manage large investments once they come in.
Let the finance specialists at Zeni take the complicated tasks off your plate and make sure your books stay organized, clear, and up-to-date so future investors like what they see.
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