Revenue-based financing, venture debt and grants provide capital without dilution, in exchange for repayment obligations or restrictions. They suit companies with predictable revenue more than pre-revenue ones.
11 min read · Level 3
The most underused question in early-stage funding is whether the company needs to sell equity at all. Equity is the most expensive capital available to a business that works, because it is permanent and unlimited in what it can cost. For companies with real recurring revenue, funding growth from revenue-based structures and keeping ownership can be worth far more than the fees look.
Not every company should sell equity. Alternatives:
Structure What the provider receives Best suited to Revenue-based financing a share of revenue until a cap is met predictable recurring revenue Venture debt interest, repayment, often warrants post-equity-round companies Invoice or working capital finance fees against receivables businesses with slow-paying customers Grants and subsidies nothing, usually with conditions research, climate, regional programmes
Revenue-based financing worked through. A company receives 100,000, repayable at a 1.4x cap, by paying 6% of monthly revenue.
Total repayable: 100,000 x 1.4 = 140,000
At 200,000 monthly revenue: 6% = 12,000 a month Months to repay: 140,000 / 12,000 = about 11.7 months
At 100,000 monthly revenue: 6% = 6,000 a month Months to repay: about 23.3 months
Paying 140,000 for 100,000 over roughly a year is expensive compared with most debt. What the company buys is no dilution and no fixed monthly payment: when revenue falls, payments fall and the term extends.
For an investor, these structures matter in two ways. They affect companies you hold - repayment obligations reduce cash available for growth - and some are available as investments in their own right through private credit funds and platforms.
Because a company that can fund growth without selling equity preserves ownership for existing holders. A business with steady recurring revenue and healthy margins may be far better off with revenue-based financing than with another dilutive round.
It also matters for evaluating companies. A company carrying revenue-based obligations has a claim on its revenue ahead of everything else, which affects its runway and flexibility.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Two ways to fund the same 100,000 of growth spending.
Route Cost Effect on ownership Equity at 5,000,000 post 2% of the company permanent dilution Revenue-based financing 40,000 of fees, repaid within about a year none
If the company is later worth 50,000,000, the 2% sold would be worth 1,000,000 - far more than the 40,000 financing cost. If the company fails, the equity investor loses their money while the financing provider may have recovered part of theirs from revenue.
The choice depends on confidence and on whether revenue can support repayments while still funding growth.
Comparing revenue-based financing with equity on cost alone. Equity has no repayment obligation and no claim on revenue; the comparison must include what each does to the company's cash and flexibility.
Multiply the advance by the cap and divide by the expected monthly payment.
Recompute the term if revenue falls by a third, and check the company can still operate.
For companies you hold, list financing obligations that take a share of revenue before anything else.
Estimate what the equity given up would be worth at a realistic outcome.
When a company you hold is considering non-dilutive funding, or when evaluating a company that already uses it.
Do not treat these structures as suitable for pre-revenue companies. Without revenue there is nothing to repay from, and fixed obligations become dangerous.
A number of specialist providers have built businesses offering revenue-based or recurring-revenue financing to software companies, and industry commentary describes founders using these structures to fund growth spending without raising equity between rounds.
For companies with predictable revenue, non-dilutive options are a genuine alternative worth modelling against an equity round.
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