Pros and cons of equity crowdfunding is a type of fundraising in which investors are given ownership of a firm in exchange for money.
It’s a viable alternative to more conventional types of fundraising, giving businesses greater control over who they do business with and on what terms.
Although it is a viable strategy, not every business will gain from it. Entrepreneurs considering equity crowdfunding should assess the benefits and drawbacks.
Friends and relatives, angel investors, bank loans, venture capital, and other sources of funding are available to startup founders. Crowdfunding is a relatively new and rapidly growing method of raising funds. In many ways, it gives startup founders more authority by allowing them to seek funds on their own, bypassing institutional finance, and preserving more control over their company.
Learn the fundamentals of equity crowdfunding, including the benefits and how to get started, by reading on.
What is equity crowdfunding?
There are many different sorts of equity crowdfunding, but for now, we’ll stick to the basics. Equity crowdfunding is a type of crowdsourcing that is based on the sale of securities. Securities are sold to the general public; in other words, a company’s founder issues public shares in exchange for financial investment. Investments range from a few thousand dollars to tens of thousands of dollars.
Investors receive incentives in different types of crowdfunding. In exchange for being the first to receive a product, they may invest in a startup or even simply a concept (think Kickstarter). Then there’s crowdfunding as a donation, in which investors give money without expecting or promising anything in return (think GoFundMe).
How equity crowdfunding works
How equity crowdfunding works
There are numerous online crowdfunding venues from which to pick. These platforms not only provide a structure for collecting investments, but they also provide extra features and services such as support, marketing, and different payment methods.
The Securities and Exchange Commission has approved these platforms (SEC). Individual donations are restricted to prevent them from becoming “overly passionate” about investments. Companies are limited in how much money they may raise, but it’s still a sizable figure – up to $50 million in a year, depending on whatever fundraising tier you choose (all of which are regulated by the SEC). Companies must be headquartered in the United States or Canada.
StartEngine’s vice president of sales, Josh Amster, is a well-known equity crowdfunding platform. When picking a crowdfunding site, he advises startup founders to examine the following factors: “How much does it cost to build a platform?” “Does it take credit cards or bitcoin as a form of payment?”
StartEngine, for example, distinguishes itself by coaching companies through the entire process, from onboarding and marketing to legal and financial advice. It also includes an investor services team and a compliance team. This is the benefit of a crowdfunding platform: it’s a turnkey solution for businesses to raise funds, as well as a mechanism for the general public to invest in firms before they go public.
Pros and cons of equity crowdfunding
Pros and cons of equity crowdfunding
Pros
Equity crowdfunding is a feasible option for firms seeking additional money and incentives from investors. If you’re having problems explaining your worth to VCs but have no trouble explaining it to coworkers or potential consumers, equity crowdfunding is a viable option.
Although it is up to you to find investors who believe in your idea, crowdsourcing is raising an increasing amount of money every year. Quick access to funds is one of the key advantages of this sort of financing. It is feasible to raise millions of dollars without going through the difficult process of courting venture capital if you have a good idea.
Giving investors a stake in your company can help you form important partnerships that can help your company succeed. Bringing in investors who understand and support your firm might be a fantastic method to establish solid ties that can benefit you later on.
Cons
Although equity investing can be a valuable source of capital for some businesses, it is not appropriate for all. According to a survey provided by Startups.com, a crowdfunding campaign’s average success rate is 50%. So, while it may work for certain organizations, it still has a significant failure rate.
Even though it’s a different approach to typical startup funding, you’ll still need to generate momentum and persuade potential investors that you have a viable business strategy. Furthermore, while bringing in new stakeholders might be beneficial, it can also cause issues. Not every investor is a successful entrepreneur. Just because someone has the financial means to invest in your firm and likes your concept doesn’t guarantee they know what’s best for it. Although you should always listen to constructive criticism and advice, giving the wrong people too much authority over decision-making can be devastating for your startup.
It’s critical to thoroughly vet the investors you’re dealing with if you go this way. Otherwise, you can run into issues down the road.
Startup founders now have another way to fund their businesses through equity crowdfunding. It is not, however, a perfect model for every firm. If you’re considering using this strategy to raise money, you should think about it carefully before giving away your company’s stock.
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