Should you raise money at all? The costs, and the alternatives

Should you raise money at all? The costs, and the alternatives

Plenty of good businesses never take outside investment, and some are better for it. Equity funding can build a company that could not otherwise exist, but it is the sale of part of your company, on terms that shape every big decision that follows.

This guide covers what raising equity costs a founder, which businesses venture capital suits, and the alternatives, with a comparison table and a checklist. Principles come first; UK and US rules follow where they differ.

What equity funding costs a founder

The price of a round is not only the percentage you sell. It is also the rights attached to the new shares, the expectations that come with them, and the time raising takes.

Dilution: a worked illustration

Every equity round creates new shares, so your percentage falls. An option pool (shares set aside for future staff) is usually counted inside the pre-money valuation, so existing holders bear that dilution, not the new investor; the National Venture Capital Association's model charter notes that reserved plan shares are generally included when a pre-money valuation is turned into a share price (NVCA model legal documents).

Illustration only: round numbers chosen to show the mechanics, not market averages.

Stage	What happens	Founders' combined stake afterwards
Start	Two founders own all the shares	100%
Seed	Investors buy 20%; a 10% option pool is created before they invest	70%
Series A	New investors buy 20%; the pool is topped up by 5%	52.5%
Series B	New investors buy 15%	44.6%

Dilution is not a loss in itself: 44.6% of a company worth £100 million is worth far more on paper than 100% of one worth £5 million. The real questions are whether the money makes the company grow faster than your stake shrinks, and whether you will actually receive your percentage on a sale. That depends on preferences. For how each round works, see funding rounds explained; to keep the cap table straight, see equity management software.

Liquidation preferences: who gets paid first

Investors in a priced round usually buy preferred shares. Under the NVCA model certificate of incorporation (updated October 2025), preferred holders are paid before common holders on a winding-up or sale, receiving the greater of a multiple of what they paid (the multiple is left blank for negotiation) or what they would receive by converting to common shares. A merger or sale counts as a "Deemed Liquidation Event", so the preference applies to an ordinary acquisition. A "participating" version lets investors take their preference and then share in what is left, with an optional cap (NVCA).

In the UK, UK Private Capital (formerly the BVCA) publishes model documents for early-stage investments; the February 2025 edition includes a liquidation preference, anti-dilution protection and an Investor Director (UK Private Capital).

Illustration: investors have put in £10 million for 40% of the company, with a 1x non-participating preference.

• Sale at £15 million. 40% would be £6 million, so investors take their £10 million preference. Founders, staff and other holders share £5 million, not the £9 million their 60% suggests.
• Sale at £60 million. 40% is £24 million, more than the preference, so investors convert. The other 60% receive £36 million.
• £15 million sale, participating preference, no cap. Investors take £10 million plus 40% of the remaining £5 million: £12 million. Everyone else shares £3 million.

Preferences stack up with each round. The more you raise, the higher the sale price must be before founders and staff see meaningful proceeds.

Control: board seats, vetoes and drag-along

The NVCA model voting agreement (updated June 2026) sets out board seats for directors designated by investors, directors designated by founders or other key holders, the chief executive and, optionally, an independent director agreed by the others. As rounds add investors, founders can lose their board majority.

The model charter's protective provisions require the consent of a set majority of preferred holders to sell or wind up the company, amend the charter or bylaws, create shares ranking ahead of the preferred, change the number of authorised shares, or pay dividends and buy back shares. Optional items go further: changing the size of the board, borrowing above an agreed amount, adopting a share option plan, hiring, firing or setting the pay of the chief executive, and approving the annual budget.

Under an optional drag-along clause, once the required holders (and, depending on drafting, the board and common holders) approve a sale, every shareholder must vote for it. The model investors' rights agreement adds information rights, an annual budget put to the board, optional observers and a right of first offer on new shares for "Major Investors" (NVCA). The UK model documents work similarly, with an Investor Director and matters needing Investor Majority consent.

None of this is sinister; it is how a minority investor protects its money. But your partners can veto the company's biggest decisions.

The expectation of fast growth and an exit

Venture funds have a fixed life. The British Business Bank notes that VC funds generally last around 12 years and exit through flotations, acquisitions and secondary sales (British Business Bank, UK Venture Capital Financial Returns 2025). A fund pays its own investors only when its companies are sold or listed.

Taking venture money therefore means aiming for a sale or listing within that window and growing fast enough to justify each next round. The NVCA model charter even offers an optional redemption right, letting investors require the company to buy back their shares in instalments after an agreed date.

The time it takes to raise

A round means a deck and data room, many investor meetings, a term sheet, due diligence and legal completion, mostly handled by founders who are also running the business. Check your data-room readiness first, and see how to raise money for a startup for the full process. Raising also repeats: the PitchBook-NVCA Venture Monitor (Q2 2026) reports that the time between rounds has compressed, especially for AI companies (PitchBook-NVCA Venture Monitor).

What happens when growth stalls

The same report finds US valuations past their 2021 highs at every series. It warns that companies which raised at elevated prices need fast growth to raise again or risk a down round, and that undisclosed terms often coincide with structured rounds, down rounds or flat rounds (PitchBook-NVCA Venture Monitor, Q2 2026).

If a later round is priced below an earlier one:

• Anti-dilution protection re-prices earlier investors' conversion rights. The NVCA model uses a broad-based weighted average, which its notes call more founder-friendly than a narrow-based formula; a "full ratchet" is the most investor-friendly. Either way, the extra dilution lands on common holders (NVCA).
• The preference stack can exceed any realistic sale price, leaving founders and staff little from a modest sale that a drag-along can compel.

Who venture capital is built for, and who it is not

Venture funds depend on a few outliers. The British Business Bank's 2025 returns report describes a model in which a small number of portfolio companies produce most of a fund's returns and cover the losses from the majority that fail. It found VC had the highest risk profile of the private asset classes compared: a standard deviation of 1.80 in the total value to paid-in (TVPI) multiple for UK funds of 2002–2020 vintages, against 0.68 for private equity (British Business Bank). Managers earn management fees, which cover running costs, and carried interest, a share of profits from realised investments.

That sets a high bar for each investment. Illustration: a £100 million fund owns 10% of your company, which sells for £30 million. The fund receives £3 million, 3% of its size. A good result for you does little for the fund, which needs companies that could return the whole fund on their own.

US money is also concentrated. According to the PitchBook-NVCA Venture Monitor (Q2 2026), rounds of $100 million or more took 87.5% of the $412.7 billion invested in US companies in H1 2026, and AI companies took 86% of all venture dollars. Yet first-time financings were on pace for a record of more than 10,000 companies in 2026 (PitchBook-NVCA Venture Monitor). First cheques are available; the largest sums go to a narrow set of companies.

Venture capital tends to fit companies with:

• a very large market and a product that sells widely;
• costs that do not rise in step with revenue, as in software;
• a credible route to a sale or listing big enough to matter to a fund;
• founders who accept that the goal is an exit.

It rarely fits service firms whose revenue grows with headcount, local businesses, niche products with a modest ceiling, or companies the owners want to run for income. Not being a venture business says nothing about whether you are a good business.

The alternatives to raising equity

Our guide to ways to fund a company compares the instruments in detail; here is what each alternative costs instead.

Bootstrapping and profitability

Funding growth from revenue keeps every share and every decision with you. The price is speed and personal risk: you grow only as fast as profits allow, and a funded competitor may move faster. Many firms bootstrap first and raise later, from a stronger position.

Customer pre-payments and pre-sales

Your customers can be your cheapest investors. Annual contracts paid upfront, deposits, paid pilots and pre-orders bring cash in before you deliver and prove demand. The catch: you owe the product, and pre-paid cash spent on growth leaves you exposed if delivery slips. In the UK, the FCA does not regulate rewards-based or pre-payment crowdfunding, only investment-based and loan-based crowdfunding (FCA), so backers have fewer protections.

Revenue-based financing

The British Business Bank describes revenue-based finance as capital provided in exchange for a percentage of a company's ongoing gross revenues (British Business Bank, Small Business Finance Markets 2024/25). Repayments rise and fall with sales, and you give up no equity. It suits steady, predictable revenue such as subscriptions or e-commerce. Compare the total you will repay with the cost of a loan, and check what happens if revenue drops.

Loans and government-backed lending

Debt keeps your ownership intact but must be repaid whatever happens.

UK. Start Up Loans are government-backed, unsecured personal loans of £500 to £25,000 at a fixed 7.5% a year, repaid over one to five years, for businesses fully trading for less than five years, with up to 12 months of free mentoring. The Growth Guarantee Scheme supports facilities of up to £2 million per business group for firms with turnover up to £45 million, with a 70% government guarantee to the lender. In July 2026 the Chancellor announced that the turnover limit will rise to £54 million and the maximum term to 10 years for loans up to £1.1 million (GOV.UK). Both are British Business Bank programmes; innovative firms can also look at Innovate UK Innovation Loans.

US. The SBA does not lend directly; it guarantees loans made by partner lenders (SBA). A 7(a) loan can be up to $5 million, with a guarantee of 85% for loans of $150,000 or less and 75% above that (SBA 7(a)). Microloans are $50,000 or less. Venture debt is harder to reach: the PitchBook-NVCA Venture Monitor (Q2 2026) says its availability to the typical US growth-stage company remains constrained and focused on AI.

Grants and R&D tax relief

Grants and tax relief are non-dilutive and can stretch your runway, so any later round can happen at a higher valuation.

UK. Innovate UK, the UK's innovation agency, focuses on deep tech businesses in priority sectors; its opportunities are listed in the UKRI funding finder (our listing). For R&D tax relief, accounting periods beginning on or after 1 April 2024 fall under the merged scheme, with an R&D expenditure credit of 20%. Loss-making SMEs whose relevant R&D spend is at least 30% of total expenditure can instead use enhanced R&D intensive support: an extra 86% deduction and a payable credit worth up to 14.5% of the surrenderable loss (GOV.UK). First-time claimants, and companies that have not claimed in the previous three years, must tell HMRC within six months of the end of the period of account, or the claim is invalid (GOV.UK). An accounting firm that knows R&D claims can help.

US. The federal research credit is claimed on Form 6765. A qualified small business (gross receipts under $5 million, and none before the five-tax-year period ending with the current year) can elect to set up to $500,000 a year against payroll taxes, for tax years beginning after 31 December 2022 (IRS). Under Section 174A, introduced in 2025 by P.L. 119-21, domestic research costs can be deducted in the year incurred, for tax years beginning after 31 December 2024 (Form 6765 instructions).

The SBIR and STTR programmes provide equity-free funding through 11 federal agencies. As of April 2026, agencies may award up to $323,090 for Phase I and $2,153,927 for Phase II without SBA approval (SBIR.gov). The programmes' authority expired on 30 September 2025 (Crowell & Moring) and was restored on 13 April 2026 through 30 September 2031 (SBA).

Browse more programmes for the UK and the US.

Crowdfunding

Rewards and pre-order campaigns are pre-sales and cost no equity. Investment-based crowdfunding is an equity round sold to many small investors through a platform (for example Crowdcube). In the UK it is FCA-regulated, and the FCA warns investors they might lose all the money they invest (FCA). In the US, Regulation Crowdfunding caps raises at $5 million in any 12 months and requires an SEC-registered broker-dealer or funding portal (SEC). It still dilutes you.

Selling a stake to a strategic partner

A larger company in your industry may buy a minority stake alongside a commercial deal, bringing distribution and know-how a fund cannot. Watch for rights of first refusal over a future sale, exclusivity, and information flowing to a possible competitor; a strategic shareholder can also put off other buyers.

How the options compare

Option	Give up equity?	Must you repay?	Best suited to	Main catch
Bootstrapping	No	No	Businesses that earn early	Slower growth; founder carries the risk
Customer pre-payments	No	You owe the product	Products with committed buyers	Delivery obligation
Revenue-based financing	No	Yes, from revenue	Steady recurring revenue	Total cost can be high
Bank and government-backed loans	No	Yes, on a schedule	Trading businesses with cash flow	Due even if plans fail
Grants	No	Normally no	Defined R&D projects	Competitive, slow, restricted use
R&D tax relief or credit	No	No	Companies doing qualifying R&D	Paid after you spend; strict rules
Equity crowdfunding	Yes	No	Consumer brands with a following	Many small shareholders
Strategic partner stake	Yes	No	Firms needing a partner's reach	Conflicts; may deter buyers
Angel and VC equity	Yes	No	Fast-growing, large-market companies	Dilution, preferences, control, exit pressure

When raising is the right choice

Raising equity is the right call when:

• The product needs years of work before revenue, as in drug development, hardware or deep technology, and loans cannot fund that.
• Speed decides the market. Where network effects reward the first to scale, growing slowly can mean losing.
• Well-funded competitors exist, and matching their pace needs capital you cannot earn in time.
• You want the venture path: fast growth, a larger team and an eventual sale or listing, on the terms above.
• The investor brings more than money: expertise, customers or a network you cannot get otherwise.

Many companies combine routes: grants, credits and revenue first, then a smaller round on better terms. If you decide to raise, work out which funding round you are ready for, then publish your raise anonymously on TrustList so investors can ask for an introduction.

A decision checklist

Answer these honestly before you start a round:

1. Could this business become large enough to return a meaningful share of a venture fund?
2. Do you want a sale or listing within a fund's life, and would you accept one you did not choose?
3. What would the money buy, and could revenue, pre-payments or a loan buy it instead?
4. Have you claimed every grant and tax relief available to you?
5. How much of the company, and of the board, will you give up over several rounds?
6. Do you understand the preferences you are agreeing to, and what they pay you at a modest sale price?
7. Can the business cope with months of reduced founder attention while you raise?
8. If growth slows after the round, could you survive without raising again?
9. Have you taken independent legal and tax advice on the term sheet?

If most answers point away from equity, you are choosing a different way to grow, not failing to raise. Founders elsewhere face the same trade-offs: see our guides for India, Pakistan, the UAE and Saudi Arabia.

About this guide

General information, not financial, legal or tax advice. TrustList does not arrange or advise on investments. Rules change; check the official pages linked above and take professional advice before acting. Figures checked on 26 September 2026.