November 21, 2016
First crowdfunding turned the idea of raising capital on its head by enabling entrepreneurs and artists to finance their endeavors by asking the crowd – be it friends, family, and even perfect strangers who were interested in their idea or concept, for monetary donations*. Though not necessarily a requirement of crowdfunding, financial backers came to expect some type of perks for their donations – this could be as simple as a thank you note to more elaborate perks usually reserved for higher donation amounts. In large part, this was due to the fact that backers were receiving no equity nor was the expectation that their investment would be repaid at any time.
Last week Indiegogo announced that they’ve partnered with MicroVentures they were ready to start offering equity investments in businesses on their platform. The difference between traditional crowdfunding to date and equity investment in a business is that now the backer is awarded shares of your business based on the size of their financial contribution.
As with anything, there are pros and cons to equity investment in your business over traditional crowdfunding. A few of the biggest are:
- With equity financing you can get the money you need to run/grow your business and don’t need to worry about fulfilling ‘perks’ to the people who donated. Your backers get a percentage ownership in your company, not a fancy coffee mug that you need to ship out to them.
- Typically, equity financing means that once your business hits a certain financial threshold, you start to pay your investors based on their percentage of equity ownership in your business. This payment is in perpetuity as long as your business meets that threshold – i.e., you don’t ever pay your investors back and are free of them unless you get to the point where you can buy them out. For this reason, you need to understand how these investors will work in and with your business. Are they expecting a role in the day-to-day strategy of your business? Are they expecting regular communication about how the company is progressing and, if so, on what schedule? You need to know what you’re getting into before you take equity investors and make sure they clearly understand that.
- Preparing for equity financing via crowdfunding can be more complex and more time-consuming than traditional crowdfunding campaigns. In addition to a beautifully-produced video that highlights the company and/or product, you also need to create an investment deck that includes things like your company’s historical financials (if applicable), understanding of the competitive marketplace, etc. Take a look at this campaign for a distillery in Washington D.C. to get a sense of the documents and materials they had to create for this campaign.
This isn’t to say that equity investment isn’t the right step for your business, either now or in the future. Equity investment is a step into the big leagues of financing and it’s an exciting moment for companies that are ready for it. The fact that crowdfunding platforms are making it easier for small companies to raise funds this way is exciting and helps level the playing field for great businesses like yours even when banks and traditional financing channels say no.
Click here to take a look at Indiegogo and MicroVentures equity crowdfunding offering to entrepreneurs and, if interested, to apply.
* Just a quick reminder that though crowdfunding sites often use the terminology ‘donation’ to indicate an exchange of money between the backer and the entrepreneur/artist; these are not seen as donations in the eyes of the IRS and are subject to being taxed.
** And another quick reminder that I’m not affiliated with any of the companies mentioned here and am not being compensated in any way for this article.
- Crowdfunding & Your Food Business (PODCAST)
- Crowdfunding Loosens The Rules
- The Qualities Investors Look For Before Funding Companies