The dilutive and non-dilutive financing
When looking for funding for your start-up, it is essential to understand the different options available. Two of the main categories of financing available to executives are dilutive financing (through the issuance of securities that dilute the company's capital) and non-dilutive financing (which does not dilute the company's capital). Each of these options has specific advantages and disadvantages that can influence your company's growth trajectory.
Dilutive financing
Dilutive financing involves the sale of a portion of the ownership (securities or shares) of your business in exchange for capital. Investors receive shares or shares in the company, which dilutes the equity stake of the incumbent shareholders.
Benefits of Dilutive Financing | |
Access to large amounts of capital | Venture capitalists, business angels, and private equity funds can provide significant amounts of funding |
Expertise and network | In addition to capital, these investors often bring valuable expertise and an extensive network that can accelerate the company's growth |
Risk sharing | Investors share the financial risks of the company, which can be crucial for seed-stage start-ups |
Alignment of interests | Dilutive investors, with an equity stake, are aligned with the founders on long-term growth objectives and value creation. This alignment can result in ongoing support and realistic performance expectations |
Tax benefits | Investments in start-ups can offer significant tax benefits. The IR-PME scheme, for example, allows individual investors to deduct part of their investment from their income tax. This tax incentive makes investments through the issuance of shares in start-ups particularly attractive to business angels |
It should be noted that by selling part of the company's capital, investors can demand seats on the company's governance bodies in order to learn about the strategy and participate in decisions.
In addition, future profits will have to be shared with the new shareholders, which reduces the entrepreneur's share of profits. Depending on the stages of fundraising, liquidity preferences may be requested for certain groups of investors which may reduce the profit further for managers and first-time investors. Transactions can be complex and costly to set up, with increased due diligence requirements, term negotiations, and reporting obligations.
Non-dilutive financing
Non-dilutive financing, on the other hand, does not involve the sale of shares in the company. It includes options such as grants, loans, tax credits, and income generated from operations. On the other hand, it is often obtained thanks to the company's good financial statements (i.e. equity large enough to compensate for an illiquidity or operational risk related to the management of the projects, which are themselves co-financed by institutional investors specialising in non-dilutive financing).
Benefits of Non-Dilutive Financing | |
No dilution of property | You retain full ownership and control of the start-up |
Less pressure on profitability in the short term | Grants and tax credits do not require immediate repayment or interest payments, which can relieve short-term financial pressure. It should be noted that business angels rarely ask for profitability before 5 years. |
Targeted support | Grants and tax credits are often available for specific projects, such as research and development, which can be crucial for innovation and long-term growth |
Flexible repayment terms | Non-dilutive loans can offer advantageous repayment terms, such as grace periods, low interest rates, or performance-based repayment terms. |
Tax credit | Tax credits for research (CIR) and innovation (CII) are tax schemes that are particularly advantageous for companies engaged in R&D activities. These credits allow companies to recover part of the expenses incurred in research, thus reducing their overall tax burden and freeing up financial resources for other strategic projects |
It is important to note that the amounts available through non-dilutive financing are generally more limited compared to dilutive fundraising. Obtaining grants or tax credits can be a long and competitive process, with strict criteria to be met. It is therefore crucial to stay focused on the main objectives: the growth of the company through commercial activity. In addition, loans must be repaid with interest, which can be a significant financial burden for a start-up, especially if it does not yet have stable sources of income.
The choice between dilutive and non-dilutive financing depends on many factors, including growth objectives, risk tolerance, and the need for control over the business. For many start-ups, a combination of the two types of funding can provide an optimal balance, leveraging the benefits of each option while minimizing the disadvantages. However, not all companies are looking to dilute themselves. Some opt for bootstrapping in order to avoid any external constraints, by financing themselves exclusively by their own income and resources. This approach allows you to maintain full control over the business and stay aligned with long-term goals without the influence of external investors.
