Entrepreneurs don’t like equity dilution. Pretty much every founder would like their company to grow without selling any or very much of their stock to investors, which decreases their ownership percentage.
There are in fact plenty of ways to fund a startup or a growing business that don’t require the sale of equity to investors. And there are also many “low dilution” paths to selling equity that will leave founders with majority or dominant ownership until exit.
Here are our 27 favorite funding sources that either don’t require selling equity, or minimize dilution. We’re not including every bootstrapping tip, and we’re not including things like credit cards or merchant cash advances that sometimes can lead to debt spirals. We have:
- 7 favorite bootstrapping ideas
- 4 favorite grant sources
- 6 favorite debt funding types
- 2 non-dilutive growth funding strategies
- 7 “equity lite” sources and strategies
Don’t get us wrong: in the right circumstances raising equity is the right thing to do. It just isn’t always the right thing to do.
Top Bootstrapped Funding Sources
- Don’t launch until a customer pays you
Plenty of entrepreneurs figure out how to get their business customers to give them a down payment on a product or service they really want. That down payment then provides part of the funding needed to launch the company. Listen to the BFD Systems interview on The Funding Coach.
Seems old school, but plenty of would-be founders save money from their job(s) until they have enough to start their business. Retail giant Forever 21 famously launched with $11,000 in savings.
While it’s hard to plan to get laid off, an attractive severance package from a big company has launched many entrepreneurs, including Mailchimp.
- Borrow from your 401(k)
Many entrepreneurs launching later in life tap their retirement savings account. It’s possible to borrow without incurring penalties, but make sure you follow the rules!
- Reinvest profits
The number one source of funding for ongoing businesses is reinvested profits. But make sure you plan for taxes owed on those profits!
- Trade upfront payment terms for discounts
Sometimes it’s better to pay a higher price if you can pay suppliers later, or to give customers hefty discounts if they pay upfront.
- Rewards based crowdfunding
Kickstarter and other rewards based crowdfunding platforms are not a sure thing, but they can help launch new products with no equity dilution.
Top Grant Funding Sources
- Win a pitch competition
- Equity free accelerators
While most accelerators that provide cash end up with equity in return, there are some that provide grants to accelerator participants.
Free government money? Not exactly. But if you can win a highly competitive Small Business Innovation Research grant you can fund your research and development. Listen to the Rockstep Solutions interview on The Funding Coach.
- SSTI member funding
There are also technology development grants at the state level in the US. Pretty much all of those grant providers are members of State Science and Technology Institute.
Top Debt Funding Sources
- Home equity loan / line of credit
One of the cheapest loans you can get is a home equity loan or line of credit. This is one reason the housing crash led to lower rates of entrepreneurship.
- Friends and family loans
Around the globe it’s very common for startups to borrow money from friends and family. Listen to the Eighteen Twenty interview on The Funding Coach.
- CDFI Microloans
If you are a minority or woman entrepreneur in the US, Community Development Financial Institutions can provide both funding and help to prepare for funding. Microloans up to $35,000 can be used in your early years, and smaller amounts are even available for launch.
- SBA Loans
It usually takes time and effort to become “bankable” – to be able to qualify for a conventional bank loan. But if you can, and if you can secure an SBA loan, you can get relatively inexpensive cash for growth, or for acquiring a business.
- Equipment financing or leasing
Certain types of business equipment qualify for specialized equipment loans or leases.
- Revenue sharing debt
We’re fans of this approach: loans repaid as a consistent percentage of revenue rather than a fixed monthly repayment. It’s a small but growing niche.
- Venture debt
Some angel investors, and some institutional investors, will lend substantial amounts to small, growing businesses at very high interest rates. It’s not an organized market, as far as we can tell, and may include “vultures.”
No Dilution Growth Options
- Corporate partnerships
If your product or technology is important to a large corporation in your industry, you may be able to fund growth through a corporate partnership. See our Corporate Partnership videos.
If your business can be replicated in “cookie cutter” fashion in different geographies, franchisees may be willing to fund your expansion. While not strictly dilutive, it is selling a piece of your future growth.
Low Dilution Equity
- Right sized equity
Equity investors come in all sizes. If you think your business won’t need tens of millions of dollars, fund it through angel investment groups or small venture capital funds who like “big successes from small dollars.”
- Impact Investors
If your business generates positive social or environmental impact, then impact investors may be willing to invest at better terms than strictly financial investors. But they may not be better terms! Listen to Balancing Profit and Impact on The Funding Coach.
- Equity crowdfunding
Selling shares through online equity crowdfunding platforms is now possible, although still relatively rare. Terms may be less dilutive for entrepreneurs than those from angel investment groups or small venture capital funds.
- Strategic Mentor Investor
If you have an exceptional business, successful entrepreneurs in your industry may be willing to invest and mentor you at relatively low dilution with no early exit expectation.
Small Business Investment Corporations (SBICs) are niche funders for growth companies that want to minimize dilution. Through an SBA program they can access debt capital, and in turn provide higher cost subordinated debt, sometimes with small amounts of equity, to companies whose other option might be more dilutive growth equity.
- Mezzanine financing
Some specialized institutional investors provide high cost, subordinated debt to larger growing companies who, like SBIC funded companies, are trying to minimize dilution.
- Wait for Private Equity or Growth Equity
Finally, some companies can grow revenue to the annual run rate of $5 million to $50 million before they need substantial amounts of equity to fuel the next stage of growth. Private equity (for slower growing or “traditional” businesses) and growth equity (for faster growing or tech-heavy businesses) will be dilutive. But if you’ve scaled to that level with no dilution and then do a “funding pivot,” you’ll still end up owning a bigger piece of the pie than through equity funding at every stage of your company.