Non-dilutive funding allows startup leaders to obtain outside capital without giving up equity.

For most startups, outside funding is essential for growth. Traditional equity financing can be a popular avenue for this much-needed cash: companies sell shares to a venture capital firm in exchange for a sum that’s tied to their valuation. 

What if you need a boost of capital but you don’t want to sell another piece of your company? That’s often the sweet spot for non-dilutive funding. 

Whether a non-dilutive financing event is two years or two weeks away, we've built a guide to help you understand your options and best practices. No matter your company stage, this guide can be a primer, a refresher or simply a resource to pin to your bookmarks page for safekeeping:

What is non-dilutive funding?

Non-dilutive funding  provides capital that doesn’t require founders to give up any equity or ownership of their company. In short, startups seeking more cash without equity dilution will find non-dilutive financing attractive.  

Startups could need capital for a variety of reasons: to hire a new team of developers or business development representatives (BDRs), for capital-intensive projects like opening a new factory or office, or as a safety net. In many scenarios, this funding is obtained through a deal with a firm that specializes in non-dilutive funding.  

So what’s in it for the firm? Non-dilutive deals and loans can have a variety of terms and structures. Firms will typically receive interest on their loan, as well as some other incentive, such as interest tied to future revenue. 

“What you’re trying to do is make some kind of tradeoff of future revenue – whether that’s percentage points on your recurring revenue or interest, or whatever it might be – to put more money in your pocket today,” said Bryce DelGrande, Vice President at Fidelity Private Shares.

What are the types of non-dilutive financing?

We’ll explore three major types of non-dilutive funding: venture debt, revenue-based financing and asset-based financing.

Venture debt

A typical venture debt deal, usually in the form of a term loan, looks like this: a startup receives a sum of capital, while the lender receives quarterly cash interest payments, some cash fees upfront, and warrants for company stock, which are options to buy stock in the future at a current price (but usually not at a similar size stake as an equity financing round).

The vast majority of venture-backed companies raise venture debt at some point in their lives from specialized banks. Venture debt makes the most sense for these companies that have previously raised institutional rounds – those that have proof and validation from VC backing, as well as success and momentum in selling their product or service.

“The best time to look at venture debt resources is often when you don’t need it. It can be an accelerant for your existing traction and success,” DelGrande said.

Revenue-based financing

Revenue-based financing provides upfront cash in exchange for a percentage of ongoing revenue until a certain multiple of the original investment has been repaid. It’s often a good fit for software companies with recurring revenue streams, or for companies with some other expectation of committed future revenue.

Generally, revenue-based financing comes with a repayment amount of about 1.5-2.5x the principal loan. Speed is a benefit in revenue-based financing deals; decisions can be fast because lenders can look at revenue projections and determine what’s feasible. 

On the flip side, revenue-based deals are typically for lower sums than traditional equity deals and lenders are often more hands-off than a venture capital firm, which often acts as an advisor to the startup.

Asset-based financing

Asset-based financing normally takes the form of a loan secured by inventory, accounts receivable, equipment or other property owned by the borrower and priced with an annual percentage rate. Assets are used as collateral to secure the loan, but not all assets qualify (this comes at the discretion of the lender).

Asset-based funding can be easier to obtain than other loans or business lines of credit. These deals also offer more flexibility and fewer restrictions on how the funds can be used. 

If you’re looking for drawbacks, asset-based deals might come at a higher cost than traditional loans, and there’s always the risk of losing valuable assets.

What are the benefits of non-dilutive funding?

The chief benefit of non-dilutive financing is that startups can obtain capital without the owners – founders, early employees, etc – giving up any equity in their company. 

Chances are, most founders and startup leaders believe their company has great potential. If you’re valued at $1 million today, but feel strongly you’ll be worth $50 million in a few years, you don’t want to give out more pieces of the pie that’ll grow exponentially.

Additionally, non-dilutive funding gives startups more flexibility. Running out of cash is a serious short-term problem for many startups, and non-dilutive financing acts as a security blanket.

“Non-dilutive funding is a powerful tool to manage runway and cash,” DelGrande said.

“It allows you to maximize your valuation because it’s giving you non-equity-based capital to grow off.”

You have to spend money to make money. A short-term, capital-intensive project – like expanding your sales team – can produce great revenue gains. However, you might be able to acquire that capital in a “cheaper” way than a traditional equity financing deal.

If your valuation skyrockets, the interest or fees you pay on a loan could be significantly cheaper than the future value of that stake of equity you gave away.

3 tips to maximize timeline, runway and revenue

Looking to get serious about a non-dilutive funding deal? Let’s get to it:

Find a non-dilutive financing partner that knows your industry.

Non-dilutive deals can take various forms. It’s generally smart to find a firm that specializes in your industry and, if possible, company stage. 

“They know the ins and outs of your business model,” DelGrande said. “They can develop their risk models based on your type of business specifically, rather than looking at it from a broad banking lens.”

We've compiled a list of non-dilutive financing options. These firms can help you with every major type of non-dilutive financing.

Be organized and prepared.

This tip is easier said than done – but it’s still very important. Remember to prepare for non-dilutive deal discussions just as you would for a call with a venture capital investor.

Have your invoicing and revenue numbers ready to go. Organize your cap table. Make sure all of those intellectual property agreements are signed. Stay on top of current news and fundraising trends.

Lenders will feel more comfortable writing you a check if you’ve shown your organizational skills and commitment to keeping robust records.

Automate your due diligence activities.

Staying organized isn’t an easy task, especially with all the other tasks on the plate of a startup leader. As you prepare to explore non-dilutive funding, it’s important to have a partner that helps you automate some of the manual work of due diligence. Fidelity offers equity management software with all the features you may need to stay ready for a non-dilutive deal. 

Your equity matters, which is why you’re exploring different deal structures to preserve your optionality. Our platform is a helpful equity management tool to keep you financing-ready at all times.

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