What is dilutive funding versus non-dilutive funding?
Dilutive funding is any capital that requires you to give up equity in your company. Venture Capital and angel investors are common forms of dilutive funding. Conversely, non-dilutive funding is capital that doesn’t take equity in exchange, such as a loan or grant.
For an early stage startup that is struggling to fuel itself it can be tempting to take any money that comes your way. While giving away a chunk of equity may feel painless early on such a decision can have huge implications later on. However, one advantage of sed capital from investors is you usually don’t have to pay it back should you fail to become profitable. A loan can leave you in the red.
Advantages of Non-Dilutive Funding:
- Maintaining ownership of the company.
- Ensuring you don’t sell shares at a much lower valuation than you potentially could after your startup has hit more milestones.
- Grants won’t leave you in debt should your business fail to become profitable.
- Investors will often find a company more attractive when they see that an entrepreneur has explored forms of non-dilutive funding before approaching them.
- Non-dilutive funding can be used to test-drive the technology, team, and business model prior to obtaining intellectual property rights and pursuing other sources of money, such as venture capital.
Types of Non-Dilutive Funding
Grants: A grant is money awarded by the government to eligible applicants. Recipients are not expected to repay the granting organization. There are usually specific eligibility criteria one must meet in order to recieve a grant. There are also sometimes expectations that come along with grant money, such as periodic reports on project outcomes and how the grant money was spent.
Vouchers: A voucher is a form of government assistance that is used to access specific goods, services, or facilities. A voucher is generally used to show that a transaction has taken place for services and there is an amount owed.
Tax Credits: While this isn’t a direct form of funding, it can certainly save you a lot of money. A tax credit is a deduction from tax owing. So companies have to spend the money first- then come tax time qualified companies will receive a refundable or non-refundable tax credit applied to the amount they owe. Refundable tax credits reimburse you for the money you spent, provided all owed taxes are paid, whereas nonrefundable tax credits are applied to tax owing but you won’t receive any excess in cash.
Loans: Commercial and personal loans are lent to the company and are expected to be paid back within a certain time period at an agreed interest rate. While this form of financing doesn’t dilute shares it can create debt so lenders and amounts should be chosen wisely.
For more information on obtaining non-dilutive funding in Canada please refer to the following resources:
Government of Canada Listing of Grants and Financing
Boast Capital’s Guide to Innovation Funding