In the course of trying to raise money for your business needs, you have the choice of seeking dilutive or non-dilutive financing. Each has a role to play, but it is important to time them right to make the most of your ownership.
Dilutive financing is any type of capital received by your company that diminishes your ownership. This includes deals with angel investors and venture capitalists when you give up a portion of your equity to gain their cash. It also includes any public or private rounds of funding that sell shares of your company.
Non-dilutive financing then is obviously any type of capital enrichment for your business that does not shrink your equity. Loans or gifts from family and friends fall in this category as do Small Business Administration loans or government grants.
Dilutive Vs Non-Dilutive Financing
While it is not always possible, the smartest financing route is usually to secure as much non-dilutive capital first, moving on to dilutive deals in future funding rounds. This preserves a larger share of control over your company while allowing it to grow quickly. Otherwise, you may be giving away too much of your equity too soon to make your company grow the way it should. Dilutive financing is best used only at critical growth spurts and other turning points. Traditional loans and other non-dilutive financings should be culled in all other circumstances.
Of course, when you are ready to start working with investors, some will want to know about your plans for future rounds of investment. They are looking to see if their equity share will also be diluted sometime down the line. In some cases, they may require provisions in their contract to protect against that happening. Yet, if your business is thriving even this dilution of your equity may be worth the infusion of working capital. A loss of some equity is typically easier to handle at later stages of your business development.
Before you go knocking on the door of every venture capitalist you know, think through your funding and equity strategy. A sound plan will help you build your business with maximum control and profits.