The basic calculation
Take an entrepreneur who owns 60% of a growth-stage software business. The company needs capital to fund its next phase, and an equity investor offers a round at a post-money valuation of EUR 30M, in exchange for 20% of the company. That values the round at EUR 6M of new capital, a realistic size for a growth-stage SaaS company at this valuation.
That 20% is not 20% of the company’s value today. It is 20% of what the company is worth at exit. Suppose the business performs well over the following years and is eventually acquired for EUR 300M, a tenfold increase from the round’s valuation. The 20% given up in that round is worth EUR 60M of exit proceeds. The entrepreneur’s personal share of that dilution cost, at 60% ownership, is EUR 36M.
The company raised EUR 6M in that round. The ownership handed over cost the entrepreneur EUR 36M at exit, six times what was raised. That is the gap between how a dilution decision feels and what it actually costs. Even if it was considered a fair price for growth capital at the time, it became one of the largest cost items in the entrepreneur’s financial life.
Why the number is usually understated
Most entrepreneurs who do run the math still understate it, for two reasons.
The first is timing. Entrepreneurs judge a round by the cash it brings in today, not by what selling the same ownership would draw in a few years later. The earlier a company raises equity, the lower its valuation, and the more ownership it must give up for the same amount of cash. Capital raised at a lower valuation is the most expensive capital an entrepreneur will ever take, because each EUR costs more ownership than it would later.
The second is the alternative. The real question is never simply whether the equity was worth it. It is whether the same growth could have been funded another way, leaving the ownership intact. If it could, the entire value of that retained ownership at exit is the true cost of choosing equity.
What timing looks like with numbers
Return to the entrepreneur who owns 60% and the EUR 6M round at a post-money valuation of EUR 30M. At a EUR 300M exit, the 20% handed over in that round cost the entrepreneur EUR 36M.
Now suppose the company funds that phase of growth without giving up equity and raises the same EUR 6M a couple of years later, once it has grown into a EUR 90M valuation. EUR 6M now buys only about 6.7% of the company. The entrepreneur gives up 4 percentage points instead of 12, and at the same EUR 300M exit that stake is worth EUR 12M instead of EUR 36M.
Same amount of capital, same exit, EUR 24M more for the entrepreneur. Even after paying for the non-dilutive financing in between, the difference is large. What changed is not the investor or the terms, but the point in time when the ownership was sold. Every stage of growth funded without dilution raises the price of whatever ownership the entrepreneur eventually sells, if they sell any at all.
Comparing equity against non-dilutive capital
Set the two options against each other honestly, because equity has a real place and the point is not to pretend otherwise.
Non-dilutive capital has a defined, visible cost. With revenue-based financing, for example, the company repays the amount funded plus a premium, as a share of revenue over time, up to a contractually agreed cap. That cost is limited and known in advance. Once the cap is reached, the financing ends, and the ownership has never been touched.
Equity has an open-ended cost that does not appear in the term sheet and only becomes clear at exit. If the company does well, the ownership you sold becomes the most expensive capital you raised. If it does poorly, the equity investor shares the downside with you, which is the genuine benefit equity provides.
The comparison is straightforward to frame, even if the answer varies by company. Before choosing, put two figures side by side: the total repayment under the cap, and the value of the stake you would give up at a realistic exit. If you believe in the trajectory of your business and you have the revenue to service repayments, the limited cost is usually far smaller than the open-ended cost of the ownership you would otherwise give away. If the future is genuinely uncertain and you want an investor to carry part of the risk, equity is a useful instrument. The mistake is choosing it without running the numbers and weighing these considerations first.
Ownership is not only about money
There is another dimension the exit number does not capture. Equity does not just cost a share of the exit. It also brings investors with rights, board seats, and a say in major decisions, and it introduces timelines and exit expectations that may not match the entrepreneur’s own. For some companies that governance is welcome, and the investors add real value. For others it becomes a source of misalignment, where the pressure to engineer a particular outcome on a particular schedule pulls against what would be best for the business. Non-dilutive capital largely avoids this. As long as the company performs as planned, the financier is repaid from revenue and has no say in how the company is run or when it exits. When you weigh the cost of an equity round, the ownership percentage is only part of it. Control and freedom of action belong in the same calculation.
A simple rule before you sign
Before accepting any dilutive round, model the figure the term sheet leaves out. Take the percentage of new shares you would issue, multiply it by a realistic equity value at exit, and multiply again by your own ownership stake. That is roughly what the decision costs you personally, in the outcome you are working toward.
Then ask whether the capital you actually need could be raised without giving that up. For a capital-efficient software business with recurring revenue, the answer is more often yes than entrepreneurs expect. What you keep compounds exactly like what you built. That is the line the term sheet never mentions.
At Round2 Capital, our starting point is non-dilutive capital: we finance growth-stage software companies without taking equity, so entrepreneurs retain their ownership. Where revenue-based financing is not the right fit, we can also invest equity, always as a minority stake and often at a later stage, to help prepare a company for its exit. We are happy to help entrepreneurs model the trade-off objectively and choose the financing approach that best fits their situation.
