An Easy Guide Into the Ins and Outs of Equity Crowdfunding
Equity crowdfunding is a type of crowdfunding initiative where business owners attempt to raise funds through a large number of people (called “the crowd”). When a person gives money through equity crowdfunding, their money becomes an investment and they become shareholders in the company or investment.
Today, crowdfunding franchises are rapidly becoming popular. For business owners, franchising is a viable way to save their business. For possible investors, it is a good way to invest in a business that does not require huge amounts of capital on their part.
How Is It Different from Other Types of Crowdfunding?
You might already be aware of other types of crowdfunding or crowdsourcing, particularly rewards-based or donation-based ones. For rewards-based crowdfunding, you expect to receive a physical item in exchange for your money such as a product made by the company. In donation-based crowdfunding (think GoFundMe), your contribution will be considered as an act of charity.
For equity crowdfunding, however, any money that you invest does not entitle you to rewards nor does it give you ownership over any part of the company. As a shareholder within crowdfunding equity, you are entitled to the benefits that the company enjoys in terms of financial growth.
Benefits of Equity Crowdfunding for Business Owners
There are three main benefits that you can enjoy if you decide to participate in an equity crowdfunding initiative.
1) Easier Access to Capital
Unlike traditional loans, equity crowdfunding does not require the same amount of paperwork and government oversight. While it does require some level of transparency and regulation, business owners can start an equity crowdfunding campaign in a significantly small amount of time. it results in raising the needed capital much faster. This also makes the business more liquid, with each fractional crowdfunded share being akin to a “share” of a stock.
2) Additional Visibility and Exposure
Since most equity crowdfunding campaigns happen online, you can take this opportunity in two folds. You are not only raising money for your business, but you are also generating brand awareness.
3) Base Engagement
Another benefit of equity crowdfunding is that you can create connections with your intended base. Even if these people do not become monetary investors, you still inspire customer loyalty by making them care about your business. Eventually, they can become regular patrons (giving back to their local community), and it makes this a win-win situation for you.
The Bottom Line with Equity Crowdfunding
As with any crowdfunding initiative, equity crowdfunding does come with some risks. Of course, the biggest risk is that the crowdfunding initiative might not hit its goal.
Another significant risk to consider is dilution. It’s a situation wherein your stake might become so small; this sometimes happens when entrepreneurs or businesses need additional capital to the point you’ll be forced to take more investors than you’d like, giving you less ownership of the company than you’d like. Concise financial management is the key to potentially avoiding this. Only raise capital if you know exactly how that capital is going to grow your business.
As an alternative investing funding option, equity crowdfunding can be a lifeline for your business. The best way to go about equity crowdfunding is by starting small and starting smart.
From the beginning, you must decide on a firm number when it comes to both the amount you need to raise and how much equity you are willing to give away. You can use these numbers as a guide when you make business decisions down the road.
At FundingFuel, we aim to help business raise capital and investors access the asset class of franchising in an easier, friendlier way. If you are interested in raising capital for your business, please reach out here. If you are an investor wanting to diversify your portfolio into the franchise space without committing hundreds of thousands of dollars (only a few hundred), please click here.