The Power of True Non-Dilutive Financing

At Gilion, we are creating a new asset class for tech - long-term growth loans that are non-dilutive. Logically, one might counter by saying that is paradoxical - is not all debt financing non-dilutive by nature? We penned some thoughts to show how the Gilion Growth Loan compared to other long-term financing options, such as venture debt, is structured in a way to be truly non-dilutive financing for founders.

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Gilion vs. Venture Debt

The key difference between Gilion and Venture Debt is the method of underwriting. In other words, the method of determining whether a company is eligible for a loan based on a set number of criteria creditworthiness and extending credit to businesses. 

• Venture Debt - creditworthiness is determined by the quality (VC sponsors) and amount of equity  (last fundraising amount and cash runway). Therefore, venture debt often can only be raised as part of a recent equity round. 
• Gilion - tech-driven approach through AIM, our in-house intelligence machine. Through overlaying prime company data with AI capabilities, Gilion determines whether a loan is possible based on future cash flows. 

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As a result of the different underwriting methodologies, venture debt providers (banks and funds) and Gilion offer different terms. The key different terms are outlined below and the impact for you as a founder is demonstrated through a dedicated scenario. 

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What are warrants and how does it impact your cap table? 

Warrants are an instrument, similar to a share option, that allows the holder the ability to buy shares in a company at a specific price until a fixed expiration date. Warrants are used by lenders to capture the upside in an investment given the extra risk they are taking with their investment to early-stage, loss-making businesses. 

There are several key things to keep in mind about warrants: 

• Warrant terms include the number of shares and the strike price (i.e. share price) it can be exercised at. 
• They are often presented in terms of coverage, a percentage of the total loan size. 
• Warrants are typically used when a company is about to exit. If a company does not perform well, the warrants may have no to little value. 

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For example, a €5 million loan with 10% coverage equates to a €500,000 warrant value. The number of shares is determined by dividing €500,000 by the pre-determined strike price, usually the share price of the most recent equity round. 

Given the typical coverage range, warrants usually represent 1-2% equity dilution to the company’s cap table. This is still a significantly lower dilution than an equity raise that often can be between 15 - 30% dilution. 

Now that we understand the differences between Gilion’s Growth Loan and a typical venture debt facility as well as how warrants work, let’s translate this into a worked example.

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Meet Rahil: founder of [x]

Rahil has always found raising capital for [x] a difficult process given the volume of conversations and long processes. Over a 3 year period, he has raised €2.6 million in equity and has reached a post-money valuation of nearly €10 million. The graphic below charts his fundraising history to date and the impact on his ownership stake. 

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After finding the initial product market, Rahil decided to increase spending to scale the business. Given the initial success of the recent expansion, he has decided to raise further capital to continue to reach scale before moving to profitability. He has decided to take stock of financing options to future-proof his business and its capital base. However, as a founder, Rahil is now conscious of the role dilution has been playing on his shareholding and has decided to look at both equity and non-dilutive financing for this fundraising round. 

Given the current cash balance and cash burn, Rahil has calculated he will require €27 million to reach profitability. Given the current business dynamics, he has decided to split this between €17 million in equity and €10m million in debt. 

On the €10 million debt raise, Rahil chose to compare an Gilion Growth Loan and a Venture Debt facility to understand the differences the two products will have on his business and his own shareholding. 

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Cashflow 

Using the current cash balance, projected cash burn and the repayment schedules of the two debt offers, Rahil forecasts the impact of three scenarios to understand the cash runway of the business.

Learnings: Equity + debt = breathing space: Adding debt to the capital raise provides an extension of runway beyond an equity-only raise to provide added optionality 

Gilion’s longer grace period has a material impact: The structure of Gilion’s Growth Loan vs. venture debt (2 years vs. 1 year) buys the business a significant runway extension and allows the business to reach profitability without any further financing.

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Debt Cost

To compare the cost of the two debt products, Rahil calculates the total cost of the facility taking into account fees, interest and warrant costs. 

To calculate the warrant cost of the venture debt facility, a conservative assumption was made that the business would exit for €200 million. Using the strike price of the warrants (current equity round share price) and the forecasted exit price per share, Rahil was able to calculate the warrant cost in terms of equity given away to the venture debt provider. Overall, factoring in the cost of the warrant, Gilion's Growth Loan is 20% cheaper than a venture debt facility. Using IRR is another helpful calculation to qualify the cost of the facility over time. 

Learnings:

• Unpacking the cost of warrants demonstrates the true cost of debt: Comparing offers by the total cost (debt + warrants) allows you to make an informed decision to show the full impact on your business 
• Important to factor in future fundraising and associated cost: Thinking beyond the immediate cost of the facility is important too. The longer grace period of Gilion’s Growth Loan allows the business to avoid another fundraising event. The requirement for future equity in [x] (as shown by the Cashflow Graphic) creates a future financing cost that should be considered. 

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Dilution

The existence of warrant coverage in the venture debt offer adds a further 1% dilution to Rahil’s shareholding. However, as mentioned above Rahil needs to think through the structure of the debt to understand any future financing risk. 

Under the venture debt cash flow example, Rahil realizes he will need to raise a future round to provide a cash buffer to take the company to profitability given the shorter grace period. Given the cost of equity, this could create between a 10 - 20% dilution factor depending on the valuation. 

‍Dilution is impacted by both debt and warrant structures: Warrant dilution is often between 1 - 2% on a fully diluted basis but grace periods and amortization lengths impact future cash flow dynamics that could create further funding requirements.

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Takeaways: How is Gilion creating a new asset class for tech? 

As demonstrated by the dedicated scenario, Gilion is providing a unique non-dilutive financing opportunity for the tech ecosystem. Through the combination of our scaleup loans and frontier growth forecasting (AIM) - we provide founders and tech companies both the necessary capital and powerful insights to steer their companies towards future growth profitability. 

Our belief is that founders should not have to give away large stakes in their company, which is often the case for traditional venture capital. Therefore, all of our loans are completely non-dilutive and can be applied outside an equity round to provide further optionality as you consider your next fundraise.