Equity Crowdfunding: Are You a Good Candidate?
Finding financing for your business can be difficult. Banks might not lend to your company because it is too risky. Venture capitalists might say that you aren’t fundable. Angel investors? They’re not easy to find.
Crowdfunding is the solution? Indiegogo and Kickstarter can be very successful, especially if you offer great rewards and are good at online marketing. There is another way to raise funds from the crowd.
This is called equity crowdfunding.
Equity crowdfunding allows you to sell shares of your company to anyone for equity. It’s not only for tech companies.
What is equity crowdfunding?
Crowd-investing, also known as equity crowdfunding or investment crowdfunding, allows startups and private companies to raise capital from the public (or the “crowd”) It allows ordinary people to invest in your company and, in return, you give them equity in your company (think Shark Tank or Dragon’s Den). Every investor has a right to a share in your company, proportional to the amount they invest.
Investors are now open to anyone.
Although this type of fundraising is not new, it was only possible to sell shares of your company to accredited investors. These were people who had certain net worths and income criteria. Your cousin, your neighbor or nearly any other member of the general public can now buy shares from non-accredited investors provided that you have set up your business properly.
Crowdfunding vs equity crowdfunding
Crowdfunding is the process of raising funds from the public, primarily via online forums, social media and crowdfunding sites like Kickstarter, to finance a project or venture. These people may receive a reward in return for their efforts, such as a copy of the product being made, or nothing at all. Kickstarter project creators and others on similar platforms retain 100% ownership of their work.
Equity crowdfunding allows you to raise capital for your project or business. Public investors receive a portion of your equity in return for relatively low amounts of cash.
What is equity crowdfunding?
It can be difficult to navigate the landscape of equity crowdfunding. Securities and anyone offering securities to the public need to be registered. Securities regulation protects investors by ensuring investors have the information they need in order to make informed decisions and that issuers are held responsible for any fraud or misrepresentations.
Equity crowdfunding is an exception. Regulators have granted registrations to platforms that can act as intermediaries between crowdfunding investors and issuers in recent years. This means that you cannot raise funding this way unless you sign up for an equity crowdfunding platform registered in your country. (Note that the amount of money you can raise through these platforms will depend on where you are located.
There are many equity crowdfunding websites available right now. However, you need to do your research in order to find the best one for your company. FrontFundr is a great Canadian platform for equity crowdfunding. SeedInvest and Indiegogo in the USA are also excellent options. It may be possible to use more than 1 platform depending on the campaign and how many investors it is.
Although the structure of your offer (including the equity percentage and the type and securities that you will sell) is complicated, it is easy to create a campaign. This is how it works in Canada and the U.S.
- Register for an equity crowdfunding platform.Register your offer on an equity crowdfunding platform to raise funds in exchange for legal shares in your company.
- Your pitch.After being accepted to your platform, it is time to start preparing yourCrowdfunding pitch. This step is the most tedious and can require frequent iterations in order to maintain interest. In your pitch, you will need to decide what the equity stake and the share price.
- Give the essential information.The platform will conduct background checks and require you to provide important information about your company to potential investors. This includes financial statements, forecasts, a credible plan of action, and other information.
- You will receive funds.The platform will verify that you have met your funding target and close the campaign.
- Your investors receive shares. Investors get a piece of your business in return for their money. Investors get voting rights in your company through these shares.
- Platform fees to be paidThese platforms handle your legal compliance and make money by charging fees. It could be a percentage of the funds raised, transaction fees or equity. It varies from one platform to the next.
- Your business will continue to get support from investors.One of the perks to having multiple investors in your business is that they will promote it like their own business.
However, equity crowdfunding is not free. While it can have amazing benefits for your company, crowdfunding does come with a cost. These costs could include:
- Compliance and legal fees
- The fees charged by an equity crowdfunding platform could be flat or percentage.
- Consultation and business plans fees
- Advertising and marketing for your campaign
Who is equity crowdfunding for
Contrary to popular belief equity crowdfunding is not just for tech companies. It’s open to anyone with a viable business plan. It’s not just for tech companies, it’s also open to anyone with a viable business plan. You can raise money by selling a portion of your business. This applies to your bakery, fashion brand, or construction company. You’re halfway to success if your product or service tells a compelling story that regular consumers can understand and endorse.
Equity crowdfunding has many benefits
Equity crowdfunding has the main advantage of raising large amounts of money quickly through crowdfunding platforms. After you have arranged your share offering with your lawyer and selected a platform, your company could be fully funded in just weeks. You would normally have to approach each investor individually to pitch your idea. This can take many years.
Another benefit is that you have company control. You don’t need an investor to sit on your board or make decisions for your company. Investors are part owners and have a stake in the success of the business. This means that you can build a dedicated team of brand advocates right from the beginning. This is a group of people who share your brand with their networks, raising awareness for your products and building brand loyalty.
Equity crowdfunding comes with risks
Equity crowdfunding has the main downside of allowing investors to raise capital from less traditional sources such as angel investors or venture capitalists. The general public is not as experienced in investing and business, and doesn’t have the same net worth as accredited investors. This means that you won’t get the capital and business advice many investors offer.
You should also consider how you would handle having investors who have a stake in the business. It is important to have a clear communication plan to keep in touch with them, and empower them to continue supporting your brand even if it takes years for them to see financial returns.
Next steps: Checklist for funding
There are some things you can do before you spend a lot on legal fees to make sure your company is ready to participate in an equity crowdfunding campaign. Also, is your start up financially viable?
It might not be the right time if your business is just a sketch on a napkin. If you can tick at least half the items below, equity crowdfunding might be worth considering, especially if your goal is to raise more than $200,000. If you believe you are fundable, but don’t have a plan for your business, the next step is to create one. These are some tips to help you create a business plan that is great.
Are equity crowdfunding options right for you?
Equity crowdfunding is transparent by its very nature. Crowdsourcing allows everyone to learn everything about your company and make comments. This means that you must be comfortable sharing details about your company’s operations.
Also, you need to be financially in tip-top condition so that potential investors can see that your company is strong and operates ethically. This organization will also help your business avoid legal problems in the future. It could also open up doors to other financing options.