Startup founders have numerous paths to fundraising, from friends and family and angel investors to bank loans and venture capital. Crowdfunding is a newer form of fundraising that has become more popular lately. In many ways, it puts the control back into the hands of startup founders, because they can raise capital on their own, bypassing institutional funding and retaining more control over their business.
Read on to learn the basics of equity crowdfunding, including the benefits and how to get started.
What is equity crowdfunding?
Within equity crowdfunding, there are many types; for now, we'll focus on the basics. Equity crowdfunding is a security-based form of crowdfunding. Securities are issued to the general public. In other words, a founder is issuing the public shares of his or her company in exchange for an investment. Investments can vary wildly, though many generally start at a few thousand dollars.
With other forms of crowdfunding, investors are issued rewards. They may invest in a startup or even just an idea, and typically it's in exchange for being the first to receive a product (think Kickstarter). And then there's a donation form of crowdfunding, where investors literally donate funds with no expectation or promise of a reward or a return (think GoFundMe).
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Equity crowdfunding gives startups an opportunity to raise more funds, and it gives the general public an opportunity to invest in a startup's passion project or area of interest with little to no hassle. Investors can simply source companies online; it's that easy.
How equity crowdfunding works
To initiate crowdfunding, startups choose from a range of online platforms. These platforms not only give startups a framework for collecting investments, but they offer additional features and services, like multiple ways of accepting payment, support, and marketing. [Interested in alternatives to small business loans? Check out our best picks.]
These platforms are registered with the Securities and Exchange Commission (SEC). There are limitations on contributions from individuals to protect them from getting "overly enthusiastic" about investments. Companies are limited on how much they can raise, but it's still a hefty sum – to the tune of up to $50 million in a 12-month period depending on which tier of fundraising you go for (all of which are regulated by the SEC). Finally, all companies must be U.S.- or Canada-based.
Josh Amster is vice president of sales for StartEngine, a popular equity crowdfunding platform. When choosing a crowdfunding platform, Amster recommends that startup founders consider many aspects. "How much does a platform cost?" he asked. "And does it accept forms of payment like a credit card or bitcoin?"
For example, StartEngine brands itself by guiding startups through the process, from onboarding and marketing services to legal and financial guidance. They also have a compliance team and investor services team. This is the value of a crowdfunding platform; it's a turnkey solution for startups to access capital, and it's a way for the public to get in early – even before the IPO – to the startups of their choice.
Life after equity crowdfunding
What's next for startups once they raise funds via equity crowdfunding?
"Some startups move onto institutional funding or angel investors," Amster said. "But the majority of our clients come back to us and raise a second or third round."
Amster also notes that while platforms like his were initially dominated by consumer-facing companies, B2B and SaaS have swiftly moved in to take advantage of the process.
"For the public, they're very interested in funding businesses that they are passionate about."