Knowing how to properly finance your business as it grows will make or break your future success as an entrepreneur.
According to research by CB Insights, only 1 out of 10 startups succeed in the long term, and one of the top reasons entrepreneurs cite for this failure is a lack of cash.
With this in mind, it’s important to understand what type of financing is right for your business. How can you make sense of the many options available? Grasping the difference between dilutive and non-dilutive financing is a first step.
Two Types of Financing
Dilutive. Financing that requires you to give up company ownership in exchange for capital. This includes:
- Sale of shares to venture capitalists or angel investors
- Public or private rounds of funding selling shares of your company
Non-Dilutive. Capital that does not require you to give up ownership of your company through shares, and therefore shrink your equity. Sources that fall into this category include:
- Gifts from family and friends
- Government grants
- Small business loans
So what’s the best one for you? It depends. Before looking around for an angel to provide a stack of cash, let’s take a closer look at the implications of each.
One obvious advantage of non-dilutive financing is that you keep the equity in your company. This is important when just starting out, as it prevents you from giving up too much too soon. Doing this could stunt your company’s growth down the road.
If you are in a critical growth stage, dilutive financing can inject the support you might need. With this approach, you’ll want to make sure you have a solid plan for future rounds of investment down the road. But be aware: the more dilution you take on, the more you’ll need to demonstrate how you plan to grow the company in the long term to remain attractive to other investors.
Your strategy may likely include a combination of sources these sources. Build a plan that gives you the amount of control and profits you are looking for.
Want advice on building a solid financial plan?
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Wavefront wants to help your company grow without compromising your equity stake. Our educational and advisory services are especially designed to help you through navigate critical stages like making financing decisions.
Get in touch with us to connect with seasoned mentors who can help you map out a solid financial strategy for your business.
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