Equity Crowdfunding falls under the larger crowdfunding “umbrella”
Equity crowdfunding is a way to connect companies with potentially thousands of investors on a single internet-based platform. But, as it is a crowded and noisy space, there is no guarantee of success. Remember, crowdfunding requires a crowd so you will be advised to ensure you have built your own dedicated following. You will also be expected to have done some pre-selling so that at least circa 25% of the funding target is already committed. The crowdfunding platforms may not list you unless you have some pre-agreed investors to the campaign.
This is potentially an alternative to a business angel and venture capital investment, primarily due to the volume of investors that can make up a deal. But it could be a means of attracting angel investors for the future if individuals want to offer for a larger stake.
Remember, equity funding is potentially very expensive as a way of raising money and therefore you shouldn’t offer more equity than is necessary. It has been very successful for some food and drink companies, not least brewers who have built a large brand following.
There is no requirement to pay dividends. Often people invest through crowdfunding as they hope to see dramatic ‘capital’ growth. The crowdfunding platforms are keen for companies to try and raise across more than one funding campaign. Therefore it is worth considering exactly how the funding will deliver growth (capital equipment, stock builds, communication campaigns).
The message you can deliver to potential investors is limited so a business plan and financial forecasts will be needed, and often a video is required to summarise the opportunity. It costs not just money in fees but time and effort to give the campaign the best chance.
Typical Investment Size: £50,000 – Millions (depending on the platform)
Stake: Typically less than 30%
Involvement Timeframe: 5-7 years
Can be a cheap form of finance. There is no obligation to pay dividends from equity crowdfunded shares, and the investors are aware of this.
A lot of investors mean a lot of ambassadors for your business, and although they will not be directly involved, they will help market your product via social media and word of mouth.
Provides confidence in your product which can help with gaining additional funding from the bank.
Equity crowdfunding is a regulated environment, and therefore provides a controlled environment for investors and businesses to connect.
Dilutes the founder’s ownership of the business.
You will have to pay platform fees to your provider.
There is no guarantee of success of a crowdfunding campaign, which could lead to embarrassment and could waste your time preparing for it.
The due diligence conducted by a platform can impact your personal and business credit reports depending on the type of checks they run.
This document is intended to be an aide-mémoire to help you consider different forms of finance and which ones might be appropriate for your business; it is not a comprehensive guide to all forms of finance. There could be different tax and legal implications associated with different forms of finance. Professional tax and legal advice should be sought to prepare for these different forms of finance.