By: Kacie Goff
In the early days of your business, funding makes all the difference in the world. But even established tech companies may find themselves in a situation where additional funding could enable a big win, like a venture into a new product or service.
Whether you’re just building your tech startup or you’re curious about your funding options to take a next step, you should evaluate whether dilutive or non-dilutive funding is right for you. And if you choose the latter, you’ll want to know which options are available to your business.
We’ll address both. But first, let’s evaluate these two separate funding choices.
Non-dilutive vs. dilutive funding
Dilutive funding means you exchange some of the ownership of your tech company for the financing you need. For example, this could mean selling shares to a venture capitalist as part of their funding agreement.
The problem with dilutive financing is that, as its name suggests, it dilutes your ownership. It could mean giving up a level of control that may not seem critical now, but could come back to haunt you as your business scales.
To protect their ownership, many tech startup founders explore their non-dilutive funding options first. This means looking for money via channels that don’t decrease your stake in your business. And, fortunately, there are quite a few different non-dilutive funding options available today. Let’s look at some of the most popular and applicable for tech companies.
Many founders consider grants the holy grail of funding. Not only are they non-dilutive, but they don’t need to be paid back. Yes, you’ll probably have to go through a stringent application process, use the funds in a specific way, and you may need to report your progress to the granting organization. But you don’t need to worry about returning the funds you get. You can fully invest them in your business to drive it forward.
Here are a few grant options that are popular with tech startups:
Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) grants
Powered by the Small Business Administration (SBA), the SBIR/STTR program has earned the moniker “America’s Seed Fund” — and for good reason. The program aims to stimulate technological innovation, making this grant program an ideal fit for tech startups. The SBIR/STTR program connects businesses with federal agencies interested in funding development in specific and relevant areas.
The program doesn’t accept unsolicited proposals, so you need to align with their pre-set schedule. Your best bet for securing SBIR funding is to identify which federal agency is most likely to award grants in the areas in which your business works, then to keep an eye on when that agency releases topics for specific solicitations.
You can also check out the topics currently open for solicitation here.
These private grants usually have more relaxed application requirements than federal grants — but that could mean more competition for the award. Corporations offer these grant monies to help spur innovation in their sector or support causes that matter to the brand (and the PR boost doesn’t hurt, either). Visa, FedEx, and Patagonia all offer corporate grants.
Some organizations hold competitions and contests, then award the winner(s) a cash prize. Take, for example, the annual competitions held at the Zahn Innovation Center at the City College of New York or the Urban Future Prize Competition at NYU Tandon Future Labs.
Prizes for competitions are similar to grant money in that they are usually prefaced with an involved application process and winning the money comes down to outperforming your competition. But unlike a grant, where the application itself is the competition, getting approved for the contest doesn’t necessarily mean you’ll take home money. You’ll need to edge out the competition, which usually means impressing the judges and meeting specific criteria. Reviewing past winners and the contest’s specific parameters can help you take home the prize money.
Research & development tax credits
Tax credits present another option for non-dilutive funding that you don’t need to pay back. One of the most popular tax credits for tech companies is the Research and Development (R&D) credit. Be advised, though, that as with any tax credit, you’ll need to come up with the money up front, making the R&D investment, then waiting until tax season rolls around to have that amount credited to your business to directly reduce its tax liability.
If you want to learn more about R&D tax credits, we’ve developed a handy guide you can use.
And if you want to get a better feel for how much your startup could claim in R&D credits, you can turn to our calculator.
A loan for your business works fairly similarly to, say, an auto loan or a mortgage. It comes with an interest rate and usually requires a credit check and some level of collateral, for example.
Your loan could come from your bank or the SBA’s microloan program. If your business is too new to qualify for a traditional business loan, you can also explore using a personal loan.
As with any loan, be prepared to pay interest on the borrowed monies and make certain you’ll be able to keep up with the amortization schedule.
Did you know that your tech startup can sell some of its accounts receivable for quick cash? This can help if you extended long net terms early in your business to help bring in clients.
If your credit terms are causing a problem, A/R factoring can help. This transaction entails you selling A/R invoices to a factoring company for a price that’s less than the total invoice amount. The factoring company might pay you out a certain percentage of that invoice or the invoice amount minus a set fee.
A/R factoring prevents you from having to wait weeks or months to collect the money your business is owed. While it can help to bridge cash flow, it can als eat into your profit margins. It can help to explore this option with an experienced accountant to ensure you’re making the right choice for your short and long-term financial needs.
We’re here to help with that. At ShayCPA, our experienced tech startup accountants can help you pinpoint the best funding options — including non-dilutive funding sources — for your business goals.
Don’t hesitate to contact us if you have any questions. Choosing the right funding can make all the difference for your tech business, both right now and for years to come.