Equity Crowdfunding: How it works

Raising Capital for a company is not an easy job and doesn’t happen overnight. Out of all the options available, it can get hard to choose the best one. From pitching to your friends and family to figuring out which Venture Capitalists would be interested in investing, it can all get a little overwhelming, and […]

Thrive invites voices from many spheres to share their perspectives on our Community platform. Community stories are not commissioned by our editorial team, and opinions expressed by Community contributors do not reflect the opinions of Thrive or its employees. More information on our Community guidelines is available here.

Raising Capital for a company is not an easy job and doesn’t happen overnight. Out of all the options available, it can get hard to choose the best one. From pitching to your friends and family to figuring out which Venture Capitalists would be interested in investing, it can all get a little overwhelming, and trust me, none of it is easy. 

Luckily, for the entrepreneurs, a new way of raising capital is available which is equity crowdfunding.

Equity crowdfunding is a process through which private businesses and startups raise capital from a pool of investors or the general public also popularly known as a crowd. 

This allows investors or the public (above 18 years) to invest in exchange for equity in the business. In this type of investment, previously, only venture capitalists or business angels could invest. Over the years, all crowdfunding platforms have done their best to democratize the investment process, allowing crowd or potential investors to invest in any private business irrespective of their wealth status. This can include your friends, family, neighbors, or any potential member of the public.

A company that is at its early stage wanting funds for its business and not listed in the market can raise funds in exchange for giving out its company’s shares. 

The securities that are issued to the people are of two types – equity and debt. Upon exchange of their finances, each one of them gets a small part in the equity as per their investment size. Henceforth, they become a partial owner of the business tied specifically to the success of the company. 

Equity crowdfunding, popularly known as crowd investing is a process that is carried out online exclusively. 

In this article, we will learn how equity crowdfunding works, the best crowdfunding sites, and everything you need to know before you opt for this type of investment process. 

Source- Pixabay

How does Equity CrowdFunding work? 

Equity Crowdfunding is powered by web platforms that publish companies that are open to investors. It is a tricky process. As for an entrepreneur, the securities that are issued to the crowd should be well-regulated and registered. This not only protects the investors from any fraud but also helps them get a clear view with all the detailed information needed to make a decision. 

The entrepreneurs can choose from the wide range of equity platforms that would publish their company for crowdfunding. Make sure you do your research and find the one you can trust and best believe in. These platforms then take care of all the exchanges and offer all the necessary support needed for a successful transaction. You can opt for multiple platforms depending on the structure of your investment.

Here, I will put down the whole process that works in the U.S.A – 

Before we proceed with the investment process, it is important to know that equity crowdfunding is not a free process. As we all know all great things come with a price, a few costs that you will need to take care of are – 

  • Fees charged by the platform
  • Legal fees
  • Business plan consulting fees
  • Marketing fees

Not to forget, equity crowdfunding has its perks and these are just a few expenses that would help you reach your goal successfully. Now, let’s have a look at the process –

1. Look for a registered platform and sign up 

One of the most crucial steps is to find the platform that suits you the best. After you have selected a registered crowdfunding platform, you need to commence raising funds in exchange for shares in your company.

2.  Make a viable pitch

Once you have been accepted by the platform, you need to start working on a pitch. An impactful pitch covering all the details about your business doings consisting of what the equity stake and the price of the share will be. Remember, your pitch needs to have all information needed for an investor to be able to understand your business. From the founder details to your unique selling point to your forecast. The smallest of details will make or break your investor pitch. 

3.  Enclose all the essential information needed

The platform performs necessary background checks to check the credibility of your business. Being an entrepreneur, you will need to provide the platform and the potential investors with all the necessary information or documents such as the financial statements, business plan, revenue forecast, and more.

4. Funding 

Once you have achieved your target, the company scrutinizes everything. They do their due diligence to make sure the transaction is true and fair and then release the funds. 

5. Exchange of shares

As promised, once you have received your funding, shares are allotted to the investors which makes them a part of the success of your company. Also, they get all the perks involved such as the voting rights in your company. 

6. Platform fees 

As mentioned above, the platform that carefully handles the whole investment process gets a reward too. The platform either charges you as per the transaction amount or takes equity in your business. This differs from platform to platform and is discussed before the whole investment process begins. 

7. Multiple Investors and their perks 

Having multiple investors in your business comes with its perks. Their connections, reach and skills are all a part of your business. They promote and get involved in your business as it is theirs and is of great use in the long run. You should put these to use and create a larger impact on the market and promote your campaign effectively

Now, we have learned about how equity crowdfunding works. Let’s discuss its benefits and risks ahead. 

Source- Pixabay

Benefits of Equity crowdfunding.

From an entrepreneur’s point of view, the biggest benefit crowdfunding has is easy access to raise a larger sum of capital in a short span. If you have a closer look, equity crowdfunding saves you time as you do not have to pitch potential investors individually. Equity crowdfunding is a matter of months or maybe weeks, whereas individual pitching might take years. 

Another great advantage is that you get a team that raises awareness about your products and builds your network.

From an investor’s point of view, the key benefit of investing through equity crowdfunding is the freedom to choose. Being an investor, you will have an idea or a product in mind to which you will resonate and pick the best business you believe in. A few other advantages are the perks or rewards investment menus bring in. Investors are usually treated with brand merchandise, hoodies, bottles, and much more. Also, if you invest in a brand you love, it’s a win-win situation!

Other than this, an opportunity to invest as little as $50 and provide support to underdogs as well as the company you love. 

Risks involved with Equity crowdfunding.

All investments come with some risk involved. Considering the investors, if you invest in a company that isn’t performing exceptionally well, you might receive fewer returns on your investments. Also, if ever a need arises for another round of crowdfunding, all your previous equity dilutes.

Next, for an entrepreneur, the greatest risk involved in taking up equity crowdfunding is not having the expertise from VCs and angels investors. Although the general public might come with a few connections, the lack of business advice from the investors will always be a drawback. 

Lastly, managing multiple investors is a task and you should develop a strategy to be able to communicate and coordinate with all efficiently.

List of Best Equity Crowdfunding Sites

As equity crowdfunding has been evolving, you will see a lot of sites entering and leaving the landscape now and then. Some of the sites might be better than what’s mentioned below. 

However, I have found these 9 websites as the best option for investors and entrepreneurs based in the U.S –

  1. AngelList
  2. MicroVentures
  3. Fundable
  4. StartEngine
  5. Equity Net
  6. We funder
  7. Localstake
  8. SeedInvest
  9. PeerRealty

Wrapping Up

Following the steps mentioned above and with thorough research, equity crowdfunding is not that difficult. Do not overlook the smallest things involved in your business, every aspect is important for successful crowdfunding. Communicate well, keep your crowd intact, make the best of pitches and be true to your goals.  

Remember, before launching or investing in a new idea, do your due diligence on various platforms and make sure to choose a platform that is stable and would meet your needs, and have the capability of having to share the same goals as you.

In the end, you will not only have the finances needed for you to continue your business but also a great team to market and grow your brand with you.

Written in Partnership with –

Claire Mark is an investment and strategic planning consultant at Alcor, a global investment bank. She’s best known for her insightful blogs on business growth, startups, small businesses, and investments. Claire also has a good network in the Finance industry, especially the investors’ community. Apart from her work, she loves to bake and go out for gadget-free nature walks.

We use cookies on our site to give you the best experience possible. By continuing to browse the site, you agree to this use. For more information on how we use cookies, see our Privacy Policy.