Non — Dilutive Funding Options

The alternative capital market is more attractive than ever. With companies choosing to stay private for longer, many are “turning to debt financing as an alternative to traditional equity rounds, in an attempt to avoid down rounds, dilution, and unfavourable terms”.

Non-dilutive funding is any kind of funding that doesn’t require you to give up equity in your business. This comes with an array of benefits for founders, particularly in the early stages, where companies can find themselves giving away too much ownership too early, compromising their cap table and future investment rounds.

Giving up significant equity in return for funding to keep the business ticking over may be a quick fix in the short term, but the long term implication of dilution can be damaging.

The equity you don’t give out can also help strengthen company finances. Motivating employees with EMI schemes and share options is a fantastic way to incentivise team members, particularly at early stages when paying high salaries for top talent may not be a viable option. If you keep equity within the business, you’re able to provide these kind of benefits, making your job openings more attractive.

A key non-dilutive funding option is venture debt, a method we’ve seen increased demand for over the past couple of years. By definition, venture debt is a type of debt financing provided to venture backed companies by specialised lenders, to fund working capital, runway, growth projections, M&A and more.

The benefits of venture debt extend to both founders and any other existing shareholders on the cap table. It is non-dilutive, cheaper than equity, flexible and tailored to your needs, and involves rapid execution and evolving facilities.

It also typically constitutes a mezzanine finance option to compliment equity raise options, providing a very efficient cost of capital, often without the same covenant requirements you might encounter with equity.

When executed in the right way for the right type of company, the key benefits of venture debt are:

‍High Growth Potential — Debt can be used to extend your runway outside of (and often shortly after) any equity events. Your customers, clients, long term contracts and intellectual property can be perceived as great assets by lenders.

Efficient Cost of Capital — For a fast growing business, cost of capital is an important consideration. If your business is growing at an annualised rate greater than cost of lending, then debt works out cheaper than equity dilution.

When looking to grow your business, it’s important to consider all options available. With the right support and guidance, alternative finance is surprisingly simple, and it’s certainly something worth considering.