Beware of Debt Warrants: Embracing Non-Dilutive Financing
Founders embarking on the journey of securing financing for their businesses often encounter various terms and conditions, especially when exploring early stage debt financing. One such aspect is warrants, which have gained popularity among investors. However, it is essential for founders to exercise caution when dealing with warrants in term sheets. In 2023, non-dilutive financing is quickly emerging as a more attractive alternative, offering numerous advantages over solutions with warrants. This article will delve into the potential pitfalls of warrants and advocate for the adoption of non-dilutive financing as a superior and more founder-friendly option.
But quickly, what are warrants? Well, warrants are financial instruments that give the holder, usually an investor, VC or a fund, the right, but not the obligation, to purchase a specific number of shares of a company's stock at a predetermined price within a specified period. Warrants are typically issued by a company alongside other investments, such as equity investments or debt offerings, as a way to provide additional incentives and safeguards to investors.
Got it! Let’s dive into some of the possible scenarios:
Dilution Dilemma: Warrants, often bundled with equity investments, expose founders to the risk of dilution. As the company grows, warrant holders gain the ability to purchase additional shares at a predetermined price, leading to a decrease in the founder's ownership stake. This dilution can significantly impact their control over the business and diminish the potential rewards of their hard work and vision.
Uncertain Valuation Impact: Warrants can introduce complexity and uncertainty when it comes to company valuation. Warrants may also present hidden costs based on a company's fluctuating valuation journey. Determining the true value of a business becomes challenging as the presence of warrants makes it difficult to gauge the potential future dilution and accurately assess the worth of existing shares.
Long-Term Burden: Warrants often come with extended timelines, entailing a waiting period before they can be exercised. This waiting period may span several years, locking up capital and hindering the flexibility and agility required for growth. Not only can warrants last for long time periods, historically the process of structuring them up in the first place can be a long time consuming and heavily legal process.
What’s the alternative? Glad, you asked. Non-dilutive debt financing presents an attractive alternative for founders seeking funding without sacrificing equity ownership or control. Unlike equity-based financing, non-dilutive debt financing allows founders to secure capital while maintaining their ownership stake and preserving the long-term value of their company
At Gilion, we introduce a new model for founders and tech companies to grow their business, offering access to non-dilutive loans and access to world class growth forecasting, via AIM, founders simply plug into Gilion’s machine learning platform with all their growth related accounts and in return get access to a detailed 5-year forecast - from which they can access customized funding, completely non-dilutive.
Some of the reasons as to why you should consider non-dilutive funding in the form of debt:
Retaining Ownership and Control: Non-dilutive financing, like the Gilion Growth Loan, enables founders to borrow funds without giving up equity. By utilizing debt instruments such as loans or lines of credit, founders can access capital while retaining full ownership and control of their business. This preserves their ability to execute their vision, make strategic decisions independently, and capture the full value of their company's success.
Flexibility and Scalability: Non-dilutive financing offers greater flexibility in managing cash flow and operations. Founders can structure repayment terms based on their business's cash-generating capacity, ensuring a sustainable financial framework. Moreover, non-dilutive debt can be obtained in varying amounts, providing scalability and the ability to access additional funds as needed for growth initiatives, without diluting equity or compromising ownership. Additionally, unlike Venture debt, the Gilion Growth Loan doesn't require warrants as collateral.
Enhanced Valuation and Investor Appeal: By leveraging non-dilutive debt financing, founders can present a more favorable picture of their company's valuation. Without the dilution associated with warrants or equity investments, the true value of the business remains intact. This can attract potential investors who are more inclined to participate in a funding round where their investments do not lead to immediate dilution, making the company an attractive investment opportunity.
To summarize, while warrants may seem enticing at first glance, founders should exercise caution and carefully evaluate the potential risks and implications associated with them. In 2023, non-dilutive financing is quickly becoming a superior, or at least complementary, financing option – providing founders with the means to secure capital while preserving ownership, control, and the long-term value of their businesses.
Gilion changes the growth experience for founders – through providing access to groundbreaking scaleup loans the frontier of growth forecasting. Gilion is now live in Sweden, Denmark, Finland and Germany. Gilion was founded in 2021 by serial entrepreneur Oliver Hildebrandt, veteran banker Axel Bruzelius, Spotify's former VP of Analytics and former EQT Ventures founding Partner Henrik Landgren.
Fredrik Westin, Head of Communications
+46 73 543 51 08