Fundraising: Dilutive vs. non-dilutive

Are you looking for financing to accelerate your business and take it to the next level? You're probably thinking of raising capital. And with good reason: it's the most widely publicized form of financing, often associated withincredible entrepreneurial success stories.

But are you really sure that fundraising is the most appropriate method of financing for your situation? Do you know what your options are? What are the advantages and disadvantages of dilutive and non-dilutive financing models? Which financing model is best suited to your start-up or scale-up, depending on its stage of development? Iter Advisors can help you find out.

What is dilution?

In chemistry, dilution is the process of obtaining a solution with a lower concentration than the initial one. In corporate finance, the concept is relatively similar, insofar as dilution means a reduction in a company's earnings per share, through an increase in capital. To put it simply: dilution corresponds to a reduction in the share of the pie held by each founder or shareholder, due to the arrival of new shareholders.

Capital dilution is to be distinguished from the sale of shares:

In the case of a share transfer, some of the shares change hands, but the total number of shares remains the same. The percentage of capital held by the shareholder selling his shares decreases, but the percentage held by the other shareholders remains unaffected.

In the case of dilution, new shares are issued to new shareholders. As a result, the total number of shares increases, while the number of shares held by the founders remains the same. As a result, the percentage of capital held by all the original shareholders mechanically decreases.

Dilution means the integration of new stakeholders, to whom the founders must grant voting and dividend rights, among other things. In this way, the original shareholders give up part of their control over their company, in exchange for capital. Non-dilutive financing, on the other hand, has no impact on the shareholder base.

Let's take a moment to understand the ins and outs of these two fundraising models.

The non-dilutive model

A non-dilutive financing provides access to repayable or non-repayable capitalwhich generally corresponds to the following cases:

Loans: these consist of an advance of funds, generally to cover a short- or medium-term cash shortfall.
Bank loans: these are debts contracted with a bank, with pre-determined duration, interest rate and repayment terms.
Honorary loans: these are interest-free, collateral-free loans for business start-ups, takeovers and personal projects. They are granted by certain organizations whose aim is to promote entrepreneurship.
Tax benefits: these include tax-saving schemes such as CIR (Crédit Impôt Recherche), CII (Crédit Impôt Innovation) and JEI (Jeune Entreprise Innovante) status.
Subsidies: these correspond to funding under certain conditions, set up to help entrepreneurs, such as public or private grants, regional aid, endowments as part of competitions, etc.
Crowdlending, crowdinvesting & crowdgiving: these are forms of participative financing, often via a platform, that enable you to solicit private individuals with or without compensation.

The advantages of non-dilutive financing

Visit non-dilutive financing enables founders to keep their shareholding intact. They avoid divide control of the company among a larger number of decision-makers. The founders or shareholders thus retain total control over their business.

The disadvantages of non-dilutive financing

The use of non-dilutive financing entails the payment of interest in the case of credits or loans. In addition, the subsidies, tax breaks and participatory financing generally correspond to much more limited financial resources than some dilutive forms of financing.

The dilutive model

A dilutive financing corresponds to the entry of a third party into the company's capital. This third party generally takes the following forms :

Business angels: these areprivate investors acting on an individual basis. They invest varying amounts in exchange for capital.
Private equity: investment funds invest in companies with a view to making a profit. Depending on the company's stage of development, this is referred to as seed capital, venture capital or development capital.
Corporate ventures: these are investment funds set up by large companies, often in the same business sector, which invest in start-ups to benefit from synergies.
Crowdfunding: this is a participative equity financing solution. Individuals can put their savings or cash flow to work in exchange for a share in the company.
Love money: this ismoney made available to entrepreneurs by family and friends. It is often dilutive, but can be non-dilutive depending on the context.

The advantages of dilutive financing :

L'integrating new shareholders provides important, structuring capital for start-ups and scale-ups. It also allows new shareholderswhich often provide valuable expertise and a network of contacts that can sometimes be invaluable. Finally, the additional equity related to the operation may lead to savings on financial expenses as cost savings from merger synergiesor a reduction in company debts.

The disadvantages of dilutive financing :

Visit dilutive financing means lower earnings per sharethe fact that there are more securities to be remunerated. It also leads to relative loss of control by founders or shareholders over their own companywhich is often a scary thought for some entrepreneurs. the share capital absorbed by new investors may be minimal.

Dilutive or non-dilutive: which financing model is best suited to your start-up or scale-up?

Now that you know all about financing modelsas well as their respective advantages and disadvantagesthe question is : which model to use to finance your business ? It depends on :

Your ambitions
Your start-up's or scale-up's financial maturity or stage of development

Choosing the right financing method for your ambitions

If you're looking for "to establish a stable and profitable family businessyour financing strategy will not be the same as if your ambition is to building the next unicorn. The greater your ambitions, the more you'll want to turn to a dilutive financing. But you should know that fund-raising is always a "non-choiceas there is no turning back and the equity story is impacted. L'equity story is the story of the evolution of a company's shares as new investors enter the market and the capitalization table changes. A wise entrepreneur avoids overvaluing your companyand it "keep under foot" for the following rounds. It is therefore important to have a clear vision of his start-up's future to choose whether or not to fundraise.

Seed or pre-seed phase, early-stage: Founders often turn to non-dilutive financing when creating their start-up. Indeed, crowdfunding or grants often enable founders to test their model, convince early adopters, and make their first sales. The classic strategy is to raise as much non-dilutive public money as possible, which can then be used to obtain a bank loan of the same amount. The only dilutive financing method favored in the early stage is love money.
Series A: On the contrary, once market traction has been confirmed, founders are more likely to turn to dilutive financing such as business angels or private equity to unlock seed-stage funds and accelerate their development.
Series B, Series C, scale phase: At a more advanced stage of development, it's common for entrepreneurs to turn to venture capital or corporate venture to raise large sums of money to help their business get off the ground.

Visit non-dilutive financing generally comes into play at the start of the entrepreneurial adventurewhile the dilutive financing is favored once the company has reached a certain stage of maturity.

Conclusion: Dilutive vs. non-dilutive

There are therefore a multitude of options for financing the growth of your start-up or scale-up. And choosing between dilutive and non-dilutive financing is a highly strategic decision.

It's more than advisable to call on the services of a support structure to help you raise funds and access the right capital at the right time.