Everyone is already familiar with the term crowdfunding, which is the practice of funding a venture or a project by raising money in small amounts from lots of people, usually through the internet. However, there are different kinds of crowdfunding options out there, and one of them is the Equity Crowdfunding, which might be a bit confusing to some of you.
Companies who would want to raise capital, there are many options they could choose from, but we all know that raising money overall is not an easy task. This is not something that will just happen overnight; you need to start pitching the idea to your friends and family and try to sell the product before it actually exists, figuring a way to make this product attractive to enough people so that your project would be funded.
1. Equity Crowdfunding is raising capital
As many of you already know, crowdfunding can be done by anyone, but what the project you are offering will be, does matter a lot since there are some restrictions when it comes to crowdfunding. Not all crowdfunding websites are open to every single idea pitched out there, however, if you are lucky enough to create an idea that sounds attractive to most, you will be able to start your own crowdfunding project.
2. The sale of all securities
Have you heard about Kickstarter? This is a crowdfunding site, probably one of the most popular ones out there, and the biggest difference between a site like Kickstarter and an equity crowdfunding is the thing that is being sold. The campaigns on kickstart raise capital by having a presale of their product, and they often offer a discount or something that will attract their fans. After the investor receives the product from a Kickstarter campaign, the contract between the company and the investor is over.
However, it is a bit different with equity crowdfunding, where the companies will sell securities, be it in a form of equity in the company, revenue share, convertible note, debt and other. Simply put, the crowdfunding in this form will give investors skin in this game. The investors are not here to participate in the buying of the product only, they are here to make a profit if they are able to invest in the growth.
Of course, this also benefits the company since it will create hundreds of brand ambassadors who are here to see you succeed, and that means that as a company, one is able to depend on those individuals to spread the word about this product, since they will also benefit from the company’s growth.
3. Who dictates the terms?
It is quite simple really, the entrepreneur raising capital will dictate the terms, and to make this even more appealing, the entrepreneur raising capital will have full control on the offering; what they will sell, how much it will cost, and at what price. They will be able to set the terms, including how much capital they are hoping to raise.
On the other hand, companies are also able to set a minimum funding goal besides their desired maximum, meaning that if they are unable to reach their funding goal completely, the entrepreneur will still be able to successfully raise capital, and those who still want to invest will be able to do that even if the market interest will not reach the maximum.
The more reasonable the valuation and the terms are, the bigger chance an equity crowdfunding offering will have in succeeding and raising capital, but there will not be VC or powers that will be demanding some terms.
4. Private companies are the ones raising capital
In the past, the general public was only able to purchase shares in public companies; aka, the companies that have done an IPO as well as those whose stocks were traded on a national exchange, and those chances are slimming through the years. There are less than 4000 publicity traded companies, and the unfortunate news I today’s world is that the IPOs are declining.
The reason for this decline is actually quite straightforward. Becoming a fully reporting public company is a very big financial burden and that is not something many companies can handle. IPOs are thus not eligible for startups, not even for the medium-sized business.
Well, this means two things: it will be hard for smaller companies to give their shareholders some liquidity, and the options for the investors to actually invest their savings in the stocks are shrinking each year. Simply put, it looks like only the wealthy are able to invest in such opportunities.
Liquidity is very important
If you were to invest in a private company that means that as an investor you would be able to see a large return, but in order to come to that, your capital would be locked for 5-10 years. Now, this is not a big thing for wealthy investors, but this is a big issue for smaller companies out there. This is why liquidity is important.
The equity crowdfunding allows these shares to be traded on public markets, and if a year after, an investor does not want to own any shares in a given company, they are allowed to sell them to any interested buyers. This liquidity is something that we did not have in the past but is essential for the crowdfunding today.
It is quite clear that equity crowdfunding is not as simple as just posting the offering or an idea and raising capital on a given website. There are some disclosures that need to be made, and the rules that you need to follow. However, equity crowdfunding offers a different fundraising option for entrepreneurs, with every new method posing its own challenge.