When thinking about ways to fund your business without giving up equity it is critical to understand the pitfalls and rewards that come with it.
In this article, we are going to explore how to fund a start-up through non-dilutive financing, while outlining the advantages and disadvantages of doing so.
What is Non-Dilutive Funding?
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The classic approach to funding a start-up is through dilutive fundraising. This is where you offer a percentage stake in your business for an agreed amount of money. You receive the investment necessary to reach your goals, and the investor owns a part of the startup which will become more valuable as the business matures.
However, another way to fund a start-up is through non-dilutive funding.
Non-dilutive funding is a type of financing where you do not give away any equity percentage in your business. In short, the business receives funds to reach its goals without selling sections of itself to outside investor ownership.
Why Non-Dilutive Funding?
Most successful investors will look to own a part of a business in which they are investing. This is not always preferential to start-up entrepreneurs. There are a number of reasons why startup founders choose to use non-dilutive investment instead.
In some circumstances, a start-up founder will put the future value of their business at a higher level than potential investors. For this reason, investors may not be able to reach an agreement with the founder over how much equity they should receive for their investment.
In this scenario, the entrepreneur simply believes their business is worth more than the investors.
Another scenario is that a start-up founder feels so passionately connected to their business that they do not want to share it with anyone else. Likewise, they may not wish to give any control over to 3rd parties. For this reason, they will not favor dilutive fundraising.
Finally, dilutive fundraising requires interest from investors. Sometimes, no matter how forward-thinking a start-up concept is, investors fail to see the potential. In this situation, no dilutive investment offers are made. This means the start-up founder has to go it alone and find non-dilutive means to fund their start-up.
Non-Dilutive Ways to Fund a Startup
There are several ways to fund your business without giving up equity. These include loans, grants, license agreements, royalty financing, vouchers, and tax credits. Let’s look at each of these.
1. Loan Agreements
Loan agreements are pretty straightforward and one of the best ways to fund your business without giving up equity. This is simply a credit line a bank or other financial institution offers a start-up founder.
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