Many of us may have heard of popular crowdfunding websites such as Kickstarter, IndieGoGo or even GoFundMe, which aggregates monetary contributions from a large number of people, hence the word, “crowd”. Those monetary contributions go towards completing a project, whether it is a prototype for a startup or helping a struggling family get back on their feet.
Equity crowdfunding is essentially the same, except instead of receiving certain rewards or satisfaction of helping someone — you will receive an equity interest in a privately held company. It is a method of offering potential investors/individuals an opportunity to invest in a private company via an internet platform (i.e. www.FundingFuel.com).
An equity crowdfunding offering is subject to securities and financial regulation, since these are privately held companies, however, this service is greatly needed for small to medium size businesses from technology startups to franchises since obtaining external capital can be hard. As an alternative, why not raise capital from your customers.
Simply put, Equity Crowdfunding refers to the process whereby a group of individuals, show interest in a new company by investing in the business in exchange for ownership in the enterprise. As a benefit to the shareholders by owning shares or membership units in the company — as the company’s value increases so does the value of their securities. In addition, if the company decides to offer a cash distribution or a dividend the shareholder could benefit from that as well. Lastly, if the company is acquired the shareholders would also benefit from that acquisition.
As with anything, investing is risky and investing in privately held companies is extremely risky. The investment could experience dilution, a decrease in profits, the shares are illiquid or the business could fail. You may ask; is the risk worth the rewards? The short answer is, yes! Investing in start-up companies can be rewarding, owning a piece of an enterprise that you believe in and could have a positive impact in — sometimes can outweigh the financial reward. Additional benefits, include job creation, funding new entrepreneurs, and even help boost the local economy.
How can someone, reduce the risk of their equity crowdfunding investment? For starters, perform thorough due diligence on the company; read the business plan, marketing strategy, financials etc. Take the time to understand the investment and what the company is all about along with the management team. Furthermore, you can reduce the risk by becoming an active investor, sharing the business on social media with friends and referring customers to the business. Lastly, add value where need it and make sure you keep in touch with the company to make sure you’re up-to-date with all the latest events.