Key Takeaways:

  • Non-Dilutive Financing Defined: It refers to obtaining funding without giving up equity or ownership, essential for preserving company control.
  • Dilutive vs. Non-Dilutive: Dilutive financing reduces ownership through shares, while non-dilutive involves loans, grants, tax credits, etc.
  • Types of Non-Dilutive Funding: Includes loans, grants (e.g., SBIR/STTR), royalty financing, vouchers, and tax credits, among others.
  • Specific Use Cases: Programs like SBIR and STTR cater to small businesses and startups focusing on innovation.
  • Disadvantages: Companies may shift focus to secure grants, which might diverge from their original goals.
  • Biotech Companies: Utilize licensing, venture debt, and royalty financing as non-dilutive alternatives to fund drug development.

Non-Dilutive: What is it?

Non-dilutive usually refers to the type of financing for a business where they do not lose any equity in the company. Non-dilutive financing means that they receive money for the business without giving away any ownership of the company itself.

Dilutive Versus Non-Dilutive Financing

Dilutive financing is any kind of fundraising where you give up ownership of your company. Examples of dilutive financing would be selling shares to angel investors or venture capitalists.

Non-dilutive financing is the type of fundraising where you do not have to give up shares of your business. This could be anything from a loan from a bank or a grant from your state's economic development agency.

Dilutive Versus Non-Dilutive Shares

Un-diluted shares show you how the company is doing today, just as things are. Diluted earnings show a worst-case scenario of what the company's stock price would be if the company had to immediately issue every share it had promised in stock options or convertible bonds.

Non-Dilutive Terms

  • Outstanding stock: Also called outstanding shares, outstanding stock are all of the shares of stock of a publicly traded company that are held by investors. These investors include officers, company insiders, and the general public. Outstanding stock doesn't include any shares that the company has repurchased. A company's outstanding stock are used to calculate its basic earnings per share, also known as EPS.
  • Undiluted Earnings Per Share: A company's undiluted earnings per share are calculated by dividing its annual profit by its number of outstanding shares. For example, a company with $10 million in profit and 10 million shares of outstanding stock has an EPS of $1.
  • Fully Diluted Earnings Per Share: To calculate fully diluted earnings per share, you need to divide the company's profit by the total number of outstanding shares, then add all of the shares the company would have to issue if everyone with stock options or convertible bonds traded them in for stock. For example, if a company with $1 million in profit and 1 million shares of stock outstanding had promised another 1 million shares in options and bonds, its fully diluted earnings per share would be 50 cents.
  • Price-Earnings Ratio: The price-earnings ratio, also known as the P/E ratio, is a way to compare company values. You find a company's P/E ratio by dividing the price of one share of stock by the company's fully diluted earnings per share. For example, a stock in a company with a diluted EPS of 50 cents is selling for $5 a share. Therefore its P/E ratio is 10-to-1. 

Types of Non-Dilutive Financing

  • Loans: Loans are perhaps the simplest form of non-dilutive financing. They may require a credit check, collateral, and guarantors. You'll then have to pay back the loan with interest.
  • Grants: There are several different types of grants for small businesses and start-ups. Grants do not need to be repaid. They require a lengthy application process and are usually meant to support a specific project or business milestone. Many granting organizations will ask for periodic reports on how the money is being used and whether or not you are on the path to reaching your targets.
    • Research grants: Research grants range from small seed grants for risky research to large, multi-year grants that support multi-faceted programs. These grants offer money as well as an opportunity to build and test the products and team prior to incorporation.
    • Translational grants: These grants are designed to speed up and assist with academic research that has commercial potential. These grants are usually about a year and are submitted in combination with the academic institution's technology transfer office.
    • SBIR and STTR Programs: Small Business Innovation Research and Small Business Technology Transfer programs are organizations that offer grants to small businesses.
  • Licensing: Deciding to license a project to an industry partner is a good way to get upfront payments as well as regular monthly or quarterly payments in order to fund the business.
  • Royalty Financing: In royalty financing, a business gets money from an investor or group of investors. In exchange, the investor gets a percentage of the company's future revenues over a certain period of time and up to a certain amount.
  • Vouchers: Vouchers are a type of government assistance that can be used to access facilities, goods, services, advice, or expertise provided by different organizations. They have no cash value, are non-transferable, and are issued in the name of the company. The funding is for a specific service provider or supplier on the voucher recipient's behalf.
  • Tax Credits: To be eligible for certain tax credits, a company has to have already spent the money. If they qualify for the tax credit, then they will either receive a refundable or non-refundable tax credit at the time that their income tax is owed.

Corporate Partnerships as Non-Dilutive Financing

Corporate partnerships offer businesses a way to secure non-dilutive funding by collaborating with established organizations. These partnerships can include joint ventures, co-development agreements, or strategic investments where the partner provides financial resources, market access, or expertise in exchange for future profits or product benefits. Examples include pharmaceutical firms funding biotech research or tech giants supporting innovative startups.

Revenue-Based Financing

Revenue-based financing allows companies to receive funds in exchange for a fixed percentage of future revenue. Unlike traditional loans, payments fluctuate with the business's earnings, making it a flexible and risk-averse option. This method is particularly popular with SaaS companies and subscription-based models.

SBIR and STTR Programs

The SBIR and STTR programs are a coordinated effort where federal agencies issue grants to small businesses in order to develop new processes, technologies, and tools that are relevant to the needs of the granting agencies.  

In 2019, roughly $3.6 billion will be distributed to U.S. small businesses through these programs. The largest grants are about $250,000 for a Phase I award and up to $750,000 for a Phase II award.

In order to qualify, companies need to be smaller than 500 employees and operate within the U.S. (there are some exceptions). There are six additional criteria that companies should attempt to meet before applying.

  • Science and engineering innovation: Government agencies want innovations that meet their needs. You should only apply if you are creating something completely new or you are able to create something that far exceeds what already exists in your field.
  • Know your SBIR Agency: Contact your nearest agency or center that is specific to your research or innovation field. If you better understand the people who will be reading your application, you can cater your application directly to them.
  • Have a good principal applicant and team: The background, education, previous experience, and past innovations of the applicant and their team are all taken into account during the application process.
  • A solid action plan: You need to be able to clearly explain to the agency what you are going to use this money for and how you are going to reach each of your specific goals.
  • Explain the commercial value: The agency that is going to offer you funding wants to know that the product you are creating will have commercial value. You should know the size of your market, who your competition is, potential partners, the relationships you've formed with future clients, and any steps you've taken to protect your intellectual property.
  • Explain where your other funding comes from: The SBIR agencies don't want to hear that they will be the only investors in your business. You need to explain your current forms of funding and show concrete evidence or plans for future investment in your project.

Eligibility and Application Tips for SBIR/STTR

To qualify for SBIR/STTR, small businesses must meet criteria such as U.S. operation, employee count under 500, and innovation in science or technology. Key tips include:

  1. Align proposals with agency objectives.
  2. Build a team with a strong track record.
  3. Demonstrate commercial viability.
  4. Create a detailed budget and timeline.

Success Stories from SBIR/STTR

Numerous startups have achieved significant milestones through SBIR/STTR funding. For example, biotech companies have leveraged Phase I and II awards to advance groundbreaking treatments and secure additional private investments.

Disadvantages of Non-Dilutive Financing

Companies must be aware that certain forms of non-dilutive financing may still allow them to keep all their equity, but at what cost?

When applying for grants or receiving loans from investors, it is important to not only receive the money you are looking for but to also ensure that you are staying true to your initial business plans. Often companies will change or mold themselves in order to fit what the grant issuers are looking for, and are never able to go back to what they initially wanted from the company. 

Non-Dilutive Alternatives for Biotech Companies

Biotech companies have to go through several rounds of fundraising before they can launch a new drug and generate revenues from it. If they do actually achieve this, the reward for the shareholders is enormous.

During the fund-raising process, investors and entrepreneurs know that this huge payout only has a certain probability of being reached. In most cases, the invested money is lost.

If the fundraising is not completed at a valuation that is seen as fair, then the company will look to other ways of financing to avoid further dilution such as:

  • Licensing
  • Debt financing
  • Venture debt
  • Convertible debt
  • Royalty financing

FAQ Section

  1. What is non-dilutive financing? Non-dilutive financing is funding obtained without giving up equity or ownership, such as loans, grants, and tax credits.
  2. How is non-dilutive financing different from dilutive financing? Non-dilutive financing retains full ownership for founders, while dilutive financing involves issuing shares or equity to investors.
  3. What are examples of non-dilutive financing? Examples include SBIR grants, loans, royalty financing, and government tax credits.
  4. Are grants considered non-dilutive? Yes, grants are non-dilutive as they provide funds without requiring equity or repayment, often for specific projects.
  5. What businesses benefit most from non-dilutive financing? Startups, biotech firms, and small businesses in research and innovation sectors often benefit most from non-dilutive financing.

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