Non-Dilutive Ways To Fund A Business

Not excited about diluting your company? How can you fund your startup business without giving up even more of it?

Equity fundraising is trendy. It can be the best move for your venture in many cases. At least at certain stages of business.

Though, it is important to understand the impact of dilutive fundraising and how it may not only affect how much you get paid in an exit but your control over your company and the ability to raise more money in the future.

The Problem With Dilutive Fundraising

Every time you give up equity in a fundraising round, you dilute your share of ownership. That can be well into the double digits.

How much you have left to give is going to make a big difference in being able to close follow up rounds. In the current startup fundraising environment, you can expect to be raising new rounds every 6 to 24 months until you exit.

Don't cut off your chances of survival and growth by becoming heavily diluted too early.

The more shares you give up, the more voting control you give up. The less control you'll have over your business, including whether you get to continue as an executive.

Money is a factor too. It probably isn't the main reason you are in this business, but it is still a factor. You are going to be putting in a lot of blood, sweat, tears, and time. Make sure it is worth it.

The reality is, that when you are diluted you can sell your company for tens of millions of dollars and not walk away with a single penny.

So, what other options are there?

Personal Loans

Non-dilutive financing is any fundraising that doesn't require giving up equity in your company. In the early days, you may want to start out bootstrapping.

The longer you can bootstrap and grow your company without giving up equity, the stronger the position you'll be in when it is time.

That means being able to give up a far small percentage of ownership, and getting more money in exchange for it.

Many hyper-successful entrepreneurs do this by financing their startups with personal credit cards. It can be risky not to separate your personal and business finances, but this can be a viable start.

Especially in a low-interest-rate environment, where you may be able to get zero interest credit card and personal loan deals for the first 18 months.

Business Loans

Small business loans from main street banks are pretty elusive. Many consider them to be a myth. You'll have much more success turning to new alternative lenders for lines of credit or small business credit cards.

It can take a little while to build your business credit, but the sooner you get started, the sooner the size of those lines will grow. A couple hundred thousand in zero-interest business lines of credit could get you through to your Series A.

Asset Financing

When you have a business plan and you are ready to go, financing specific needs can open up more channels for gaining the capital you need. You'll find lenders offering to finance specifically for computer equipment, equipment leasing, and real estate.

In fact, it can be a lot easier to finance a commercial building than to get the money to just buy a business it houses. It offers concrete collateral for lenders and their investors.

If you do need offices (which is rare today), you may be able to buy the building and create cash flow from leasing out other units while you grow into it. That can give you the money to pay off your headquarters and carry your payroll.

Grants

Local and federal grants are an often overlooked form of non-dilutive funding for startups. Often this money is just sitting there, burning a hole in the pockets of local government and organizations who need to deploy it.

The amounts may not be as huge as a big VC funding round, but they can fill in the gaps, often without any repayment required.

Check out opportunities on a community, city, county, state, and federal levels.

Competitions

There are a wide variety of competitions at all types of levels that can provide startup funding. These range from schools to startup accelerator backed competitions. They can run from business plan competitions to coding, to design, to growing a business fast.

Winnings may run from $10,000 to over $150,000 per competition. Even better, aside from not giving up equity, you can also leverage these events into plenty of great press, buzz, and visibility for your startup.

Licensing

If you can bring in enough income, you may not need outside fundraising at all. Scaling sales as a small team who is mostly technical can be challenging, but there are hybrid options. You can license your IP, you can get royalties. You can franchise and presell. Just make sure you run these ideas by your fundraising and M&A advisor to understand their impact.

Merchant Advances

If you already have sales but need larger lump sums of capital to get to the next level and make investments that will help you scale, considering merchant advances and similar working capital financing.

It can be expensive or requires rapid payback from the top of your revenues, but doesn't require giving up equity.

Summary

Dilution is dangerous as a startup entrepreneur. Raising money can be necessary to see your vision come alive.

At some point, it may be the best move to enable your venture to achieve its full potential. Just make sure you understand the impact at every round. Know your alternatives.

BIO

Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by 'Shark Tank' star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today's way of raising money for entrepreneurs.

Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.

Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).

Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.

Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.