Being a founder of a startup seems fun and exciting. But of course, there are many responsibilities, such as with hiring or firing people, agreeing to leases, and making decisions about the product or service. And yes, one of the toughest is funding. It is complicated, stressful and means giving up a piece of the company’s equity. But there is a new approach that helps to mitigate some of the issues: equity crowdfunding.
This involves raising money by posting a profile on a website. You set a minimum for the amount to be raised and put together some terms. Then investors can sign up for the deal. In fact, the minimums can be as little as a few hundred bucks. As a result, crowdfunding often means having many investors.
So then, what are some of the key reasons to take this route? Let’s take a look at seven:
Terms: Compared to other types of funding, such as from venture capitalists (VCs), crowdfunded equity tends to be more favorable when it comes to investor preferences. There are usually no requirements for board representation, inspection rights for the books or protections if the company is sold below the valuation of the funding. A main reason for this is that investors usually have a small equity holding. In other words, the founder will not be at risking the loss of control.
Alignment of Interests: The investors from crowdfunding are often passionate about your product or idea. Making a profit may not even be the main priority!
“For us, our customers were our equity investors,” said Brian Dally, who is the co-founder and CEO of Groundfloor. “Customers can understand the full value of you better than any VC ever could. That means they invest more quickly, repeatedly over time, and with greater conviction and certainty.”
Higher Odds of Success: Banks generally provide financing for those companies that are large. As for VCs, they mostly focus on startups in the tech and biotech categories.
But with crowdfunding investment, just about any kind of company has the potential for getting funding. There is also no criteria on the size. The company can actually be at the idea stage.
There are no geographic restrictions either. Basically, there is not need to go to Sand Hill Road in Silicon Valley for the funding.
Feedback: By having a public profile for your company, you can get valuable insights. In a way, crowdfunding is a way to test your product or service.
PR: When doing equity crowdfunding, there needs to be lots of promotion, such as through social networks like Twitter (NYSE:TWTR), LinkedIn or Facebook (NASDAQ:FB).
“You can turn your customers into long-term investors,” said Brian Belley, who is the founder of Crowdwise. “You can gain hundreds or thousands of brand ambassadors and brand champions to help spread the word and gain additional traction for your brand and product.”
Relaxed Regulations: Because of the hardships from the novel coronavirus, the Securities and Exchange Commission (SEC) has loosened the requirements for equity crowdfunding. “The changes allow for companies – which have existed for more than six months — to expedite the offering process,” said Ben DiScipio, who is the co-founder and chief strategy office of Fundopolis. “Of note, now if a company hits their minimum, they can close on it right away – as soon as 48 hours, where before it was 21 days. Companies also can raise up to $250K a year without having to provide reviewed financials. Instead they can self-certify, which will save time and money.”
Costs: A crowdfunding site usually does not charge a setup fee. Rather, there is typically a commission for the amount raised. Basically, you only pay if the funding is a success.
Tom Taulli (@ttaulli) is an advisor and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
