Investors vs Grants: Understanding the Differences
Two different forms of funding - investors and grants - but which one is right for your business?
Investors and grants — are they really that different? Yes, they are, and as someone in the business world, it’s important to understand their differences and what will work best for you.
If you’re not new to the Pocketed platform or our blog, you likely already know all about grants. Grants are a form of non-dilutive, reimbursed funding that helps you scale your operations.
A common grant myth is that there are lots of strings attached to utilize funds, but that’s actually false. If you qualify for a grant, it’s usually as simple as applying, reporting, and getting reimbursed resulting in significant flexibility.
When dealing with investor funding, however, securing ‘ no strings attached’ funds is not an option. In every case, you will be held accountable by this third-party investor to earn a return on their investment.
Investors are an important part of most businesses, and both grants and investors can be used to your advantage, but before you dive in headfirst there are a few things you need to know.
Dilutive vs Non-Dilutive
One of the biggest differences is the retention of equity. Not all investors will take a part of your business in exchange for the money they invest, but most do. This is what is referred to as dilutive funding. You get money to bolster your business and the investor takes a percentage of ownership out of your pocket.
Whether you’re getting money from an angel investor–a high-net-worth individual who will loan capital to small businesses in exchange for ownership equity–or a venture capital fund–a firm with investors willing to invest in exchange for equity–you are still giving up a part of your business.
But non-dilutive funding is different. These funds don’t require you to exchange equity, or put up collateral (see loan funding), to secure capital inflow. At Pocketed, we directly connect you with non-dilutive funding so that you can scale your business while retaining full ownership.
Reimbursement vs Loans
Grants are reimbursed funding. This means that most grant providers will not give you money upfront. You will apply for and get accepted for the grant, then fund the project yourself (or through grant-based financing, which Pocketed can help you with) and after submitting pay stubs and reports, you get your money back! Simple as that!
Investor funding can be more complicated because they are the ones to be “paid” back. But your payment might not necessarily be cash. There are three ways investors will usually request to be paid back.
Equity: We already talked about equity a bit, but this basically means you’ll pay back the investor for the funds they gave you by giving them a piece of your company. The percentage you give them will be worked out between you and the investor.
Loan: This is also called debt-based fundraising and is the simplest form of payback. You borrow money from the investor to get your company off the ground and you pay it back with a pre-decided interest rate in an expected time frame. Usually, in these cases, you will also have what’s called collateral. In the case that your business goes under and you can’t pay back the loan, the investor can then take your collateral (could be your house, car, insurance policy, bonds/stocks, etc.) The more collateral you put on the line, the bigger loans you’ll likely secure.
Convertible Debt: This option is kind of a mix of the last two. You borrow the money and either repay it with interest or this debt can be turned into a common company share at a later point in time. With this type of repayment, you’ll usually offer a discounted share price to the investor as an incentive for the investor to convert. A discount means the investor will be able to convert their loan into equity at a discounted rate (for example 20%). There’s also typically a valuation cap on this type of payment — this is the maximum amount at which the investors can convert to equity.
Got all that?
We know it’s a lot, but as a business owner, it’s important to understand the differences and how each of these options (grants or investors) can benefit your company. You might not know right away how you want to earn capital, but that’s okay.
For now, let’s set you up for success by creating a Pocketed account where you can browse all eligible grants and find out if grant-funding is right for you!