4 min read
Sep 13, 2022
Non-Dilutive Financing for Game and App Developers
As a game or app developer, securing financing can be time consuming and overwhelming. You may feel excited that you’ll finally get the funds you need to grow, but simultaneously worried that you’ll need to give up some of your company equity or creative control in exchange.
Luckily, that’s not always the case. Non-dilutive financing can provide you with the growth capital you need without relinquishing any of your business or creative ownership.
What is non-dilutive financing?
The short answer is that non-dilutive financing is any type of financing that doesn’t require you to give up any of your equity (ownership in the company) as a condition for receiving the funds. Examples include bank loans, lines of credit, and revenue-based financing.
But to really understand what non-dilutive financing is, we need to get to the root of the term: what does dilutive financing mean? And what is the dilution of a company?
If you’ve ever taken a chemistry class, you may have some idea already. When you dilute a liquid or solution, you make it thinner or weaker by adding more liquid to it. Similarly, when you dilute a company, you “thin out” the existing ownership by adding in more shareholders, which, all else being equal, means each of the original shareholders will own a smaller portion of the company.
Dilutive financing, then, is simply financing that forces you to dilute your company. In other words, an investor will offer you money in exchange for a share of ownership in your company. This type of financing is called equity financing, and it involves equity dilution.
Let’s take a look at an example to make things clearer. Imagine you and your co-founder split ownership of your development company straight down the middle so that you each have a 50% share. When you’re ready to seek growth financing, you find an investor that offers you $100,000 in exchange for a 10% stake in your company. To accommodate that, you and your cofounder would need to reduce your equity to 45% each. Of course, you could agree on a different split — say 50-40-10 — but the important point to remember here is that there are now more hands in the pot and individual equity needs to be thinned (diluted) somewhere.
That’s the simplified version. But in reality, fundraising typically goes on for several rounds, each one potentially diluting the company further and further — over time, it may bring you from 50% ownership to a minority share.
For game developers in particular, there’s another aspect of dilution to consider: not only do you end up with a smaller financial share, but you can also end up with less creative control. If you go the dilutive funding route, you need to be ok with not having complete control over your game’s creative direction, feature release, and publishing schedules, and more. This is more common with publishing deals.
So, circling back around to where we started, non-dilutive financing is simply any type of financing that doesn’t require dilution of your company ownership.
What are the different types of non-dilutive financing?
Non-dilutive financing is a relatively broad term that encompasses a variety of different financing options. Here are a few of the most common types.
Whether from a bank or another type of lender, a loan is probably the most familiar financing option — we use them in many facets of our everyday lives, such as for mortgages, auto loans, and more.
When you get financing through a loan (debt financing), a lender will give you money on the condition that you pay it back with interest on a regular schedule. More often than not, it is compound interest. They won’t retain any ownership in your development company, but you’ll typically need to budget for fixed monthly payments.
Lines of credit and credit cards
Just like loans, lines of credit (LOCs) are everywhere — it’s the financing structure behind credit cards, overdraft fees, and HELOCs (home equity lines of credit).
A line of credit can be thought of as a revolving loan. Instead of receiving an upfront lump-sum payment that begins to accrue interest immediately, a line of credit is essentially a promise from a lender that you can borrow up to a certain amount whenever you want. Payments and interest accrual will only begin once you actually make a purchase.
For example, a lender could extend a $30,000 line of credit (LOC) to you at a 6% monthly interest rate. You can keep that LOC open without using it, and you won’t have to pay anything. But if you make a $10,000 purchase, you’ll have to start making monthly payments. You can continue making purchases until you reach the $30,000 limit, and your minimum monthly payment will scale with your balance.
A grant is sort of like a scholarship for a business: it’s a lump sum payment that you don’t need to pay back. Governments and organizations offer grants to businesses to promote their development or help them when they’re in need.
Grants are highly sought-after, but they’re difficult to get — you typically need to win a competition to receive one or meet a specific criteria set by the entity providing such grants, such as UK Games Fund in the UK or The German Games Industry Association in Germany.
(It’s always a good idea to see if there are any that you qualify for. For example, you could begin your search for a US federal government grant by checking out grants.gov, but that’s just a starting point — you’d have to do a fair bit of research to find all the different options available to you.
To do so, companies typically offer pre-order sales with perks. For example, you can offer special in-game items or physical collectibles in exchange for contributions. None of your customers will retain any interest in your company, and you won’t have any loans to pay back.
However, you need to be absolutely sure that you can deliver on your promises. If you don’t, you could end up with not just a tarnished reputation, but a mountain of class action lawsuits on your desk.
Venture debt is typically offered to companies that have already secured equity financing previously. There are some similarities with a traditional loan. However, the loan amount is typically tied to the amount of equity funding a company received and is affected by who the institutional investors are. Venture debt has a lot of nuances in its term sheet, including warrants, which ultimately are rights for equity and hence, additional dilution.
Merchant cash advances
A merchant cash advance (MCA) is a type of financing where you’ll receive a lump sum payment that you’ll pay off over time. There is a fee that’s paid once and there is no compound interest like in the traditional lending products.
An MCA is effectively a purchase of a percentage of your future sales. That means that you pay back the financier by giving them a portion of your future revenue you make until you pay off the total lump sum you received in the first place.
Sanlo Capital, for example, offers MCAs with a one-time fee starting from 3-8%. All offers are based on existing company data to ensure that Sanlo’s MCAs can be easily paid back without compromising the overall finances of a company.
Pros and cons of non-dilutive financing
Like any financing method, non-dilutive financing has its advantages and disadvantages.
The primary benefit of non-dilutive financing is that you don’t have to give up any ownership of your game or app company. However, unless you get a grant, there’s no free lunch, so in most cases, you’ll need to take on a financial burden instead: paying back the money you received with a fee on top.
Equity financing, on the other hand, gives investors and publishers a special interest in your game: the more successful it becomes, the more money they make. So, when an investor or publisher truly believes in your product, they’re willing to offer you money that you may not have to pay back directly — so long as they get a piece of the pie.
Because of that interest, they’ll also typically give you access to their resources, like their network. But they’ll probably want more control over the direction your company takes. This can be both good and bad: their expertise, connections, and experience can be invaluable, but dilutive financing ultimately means relinquishing some control, financially and creatively.
Overall, neither type of financing is necessarily the right or wrong choice — it all comes down to fit. Most companies will use several types of financing structures to fulfill various needs at different points in their lifespans.
However, if you’re a game developer looking for a middle ground between equity and debt financing, revenue-based financing from a company with game-specific experience is an alternative funding option that deserves serious consideration. The Sanlo team brings years of experience of working in the game development space, and are creating financial products to empower you and help you grow on your terms.