Non-Dilutive Funding

Definition

Non-dilutive funding is a kind of capital raising in which you do not have to surrender any of your company's ownership interests. Loans and grants from your state's economic development department are two options.

Various Forms of Non-Dilutive funding

Non-dilutive funding may take several forms. Crowdsourcing, loans from family members, product licensing and royalty payments, tax credits, and other incentives are some of the most common forms.

Non-profit organizations and governments alike often provide grant awards because they enable companies to use the funding right away for activities like research and development, product development, and clinical trials.

Other non-dilutive funding options include:

• Debt for start-up companies

Debt funding for venture-backed firms is known as venture debt. Entrepreneurs who cannot give up stock or receive finance from banks use venture debt to avoid giving up equity and taking on debt.

This money isn't coming from venture capitalists, which is a big deal. Venture debt funding is provided by a bank, hedge fund, private equity firm, or business development company rather than a traditional bank.

Venture debt is a wonderful complement to equity when a company wants to prolong its runway between funding rounds, fund a particular project, buy equipment, or control dilution. Any firm that accepts a loan must pay it back since lenders might compel the guarantor to file for bankruptcy to collect the loan money.

• Lending for Recurring Revenue per Year

The worth of a company's subscriber base or the annual value of a single subscription is "Annual Recurring Revenue," or ARR. Measures such as Spotify, Adobe's Creative Cloud, and Netflix use it to determine their revenues.

SaaS firms' ARR is a common metric used by alternative lenders while evaluating them. To decide whether a long-term business relationship is possible, lenders use the ARR in conjunction with the customer renewal rate.

In a way, ARR financing is comparable to venture debt, enabling subscription-based services to optimize their returns without sacrificing control of their businesses.

• Equities Structured as Products

Structured equity products are pre-packaged investment solutions that comprise a variety of assets connected to interest. An index or basket of stocks or commodities may be used to derive the final goods.

Put another way, the return on investment is tied to the characteristics of the underlying asset, such as its capital protection level or its maturity date.

Crowdfunding

A firm's image may suffer if crowdfunding or family loans (income obtained from relatives) don't work out as expected, particularly if the company owner relies on them to raise tiny sums of money via internet appeals.

Although tax credits might reduce the amount of money your company pays, they require the corporation to put money aside upfront. Nonrefundable and refundable credits are available to firms that meet the requirements. When a company pays all of its taxes, it receives a cash return; it receives a direct cash inflow when it doesn't.

Other aid forms, such as vouchers, provide business owners access to government-subsidized products, services, or expert advice. Non-transferable vouchers don't usually have a financial value since they are held in the firm's name. For the recipient's benefit, the funding is sent directly to the provider.

Conclusion

Funding for startups and small and medium-sized businesses that do not involve the transfer of stock or ownership is known as non-dilutive funding. In the early phases of a company's development, non-dilutive funding is critical, but it is invaluable as it grows. Non-dilutive funding may take numerous forms, including crowdsourcing, grants, loans from family and friends, tax credits, and licensing.