Equity Crowdfunding Explained: A Better Way to Raise Capital
If you’re looking for ways to fund your business without going into debt, equity crowdfunding may be the financing option you need. This can be a great financing option for small businesses as it gives you the capital you need without costing you much upfront.
But what exactly is crowdfunding? And what makes equity crowdfunding different? Well, to answer these questions, let’s dive into an examination of a few different types of crowdfunding and the specifics of equity crowdfunding before we review some of its benefits and disadvantages for your small business.
What is Crowdfunding?
Crowdfunding is a method of financing business ventures through the help of a network rather than a bank or professional lender. With crowdfunding, a person will use small amounts of capital from a large number of people in their network via social media and crowdfunding websites to fund their projects.
There are several different types of crowdfunding options in addition to equity crowdfunding that you can choose, including rewards-based crowdfunding, debt crowdfunding, and donor crowdfunding. Let’s take a quick look at each of these to better understand their differences.
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Rewards Crowdfunding
Rewards crowdfunding is a fundraising option that provides benefits to your investors in exchange for them financing your project so you don’t have to go into debt. These rewards can be simple or complex, and they can be tailored to motivate your investor audience. For example, if you want to fund a massive art project, you may offer smaller art samples to your investors. If you’re using the crowdfund money to write and publish a novel, you may promise signed editions of the book.
Debt Crowdfunding
This type of crowdfunding is a cross between regular crowdfunding operations and investing in a small business loan because you’re essentially taking out a loan from your investors instead of being handed “free” money. You’ll typically have a repayment agreement with set terms, interest percentages, and timelines to structure this financing option.
Donor Crowdfunding
With donor crowdfunding, investors donate money to your project with no expectation of benefits or a return. Typically, charities and other non-profit organizations use this form of financing to gain support for their causes.
How is Equity Crowdfunding Different?
Equity crowdfunding, also known as regulation crowdfunding, differs from all other crowdfunding options because it allows you to finance your projects through private investors in exchange for unlisted shares in your company.
You still propose your investment opportunities online, but in exchange for their cash, you trade with anyone who invests partial ownership in your company. This prevents you from going into debt or having to fund expensive rewards options, but it does also mean that you lose full ownership.
Additionally, equity crowdfunding is governmentally regulated and comes with many more rules and regulations than other crowdfunding options. Failure to comply with these regulations may result in your business being required to refund investments or have your ability to offer shares frozen for a period of time.
Is Equity Crowdfunding Legal?
Yes, equity crowdfunding is legal. According to the U.S. Securities and Exchange Commission, private companies can legally raise up to five million dollars over the course of a twelve-month period through equity crowdfunding.
Benefits of Equity Crowdfunding
There are many different benefits you can take advantage of if you choose to finance your projects with equity crowdfunding. Some of the top-rated benefits include the following.
You Don’t Need to Qualify
If you’re struggling to qualify for a small business loan or any other kind of professional financing due to credit issues, revenue limitations, or any number of other factors, equity crowdfunding may be the option for you. This is because, with equity crowdfunding, you don’t have to meet any financial requirements or lender requirements to be eligible for financing.
You Won’t Have Debt
If you take out a loan from a bank or private lender, you have to repay that money eventually, and most of the time the amount you borrow also comes with additional interest fees that cause your repayment to continue to grow until you’ve repaid the entire amount. With equity crowdfunding, you’re not borrowing money at all. You’re trading shares of your company for amounts that investors pay, so you can complete your project debt-free.
You Have Access to Numerous Investors
Most traditional lenders and banks that work with small businesses will likely be single-party investors who are limited in the amount of money they can supply you with. But when you choose equity crowdfunding options, you can have as many investors as you want. You can even draw in nontraditional investors including friends, family, and other community members to support your venture.
As the business owner, you’re 100% in charge of how many shares you want to offer your investors. You don’t have to keep selling them once you’ve made enough money to finance your project. Instead, you can retain the majority of your business’ equity for yourself and maintain control of your company even as you trade shares to investors.
You Generate Buzz About Your Business
By promoting your investment opportunity online through crowdfunding, you’re able to get your business in front of a broader audience of engaged individuals and make connections with new potential customers you may not have been able to connect with on your traditional social media platforms.
Disadvantages of Equity Crowdfunding
While there are many different advantages to choosing an equity crowdfunding option to finance your business, there are also a few key disadvantages that you should consider before jumping in. These include the following:
Equity Can Be Complicated
Trading equity or shares in your company for cash can be a good way to get your business off the ground. However, because investing in a startup can be risky, it could be hard to find investors. You’ll need to do significant research before you start your campaign, especially if you’re using a crowdfunding platform. These platforms have their own guidelines, and you also have to stay in line with state and federal standards. Additionally, you may lose some say in how your company operates if your shareholders retain enough shares and want their input considered.
Crowdfunding Is Time-Consuming
To generate enough money through crowdfunding options, you have to be very dedicated to spreading the word about your venture online to potential investors who might be interested in your company. And even if you work very hard to market your campaign, there’s no guarantee that it’ll take off and generate enough income to make your time and effort worthwhile
You Won’t Have Traditional Investors
Typically, traditional investors will not be interested in helping you finance through an equity crowdfunding option because they will have to take on a much greater risk without the guaranteed financial benefits they are sure to receive if you choose to take out a loan or other financing option. Instead, they would only have shares of your company to offset their investment, and if your business doesn’t do well, they will suffer a loss.
You Don’t Get To Keep All the Money
Equity crowdfunding platforms are not a free way to make money for your venture. Instead, the platform you use will take between five and fifteen percent of the money you raise as a commission for using their services.
