How equity crowdfunding works
Ideal for startups, investors provide funds in return for a stake in your business.
Looking for investors but don’t know where to start? You might want to look into equity crowdfunding platforms, also known as securities-based crowdfunding. Here, you can get connected with accredited investors and even everyday consumers willing to fund your business. The trade-off is that you’ll lose full ownership of your business, which can affect your future financing options and potentially the direction of your company.
What's in this guide?
- What is equity crowdfunding?
- How does equity crowdfunding work?
- 4 quality equity crowdfunding platforms to consider
- How much does equity crowdfunding cost?
- What types of businesses can benefit?
- Benefits and drawbacks of equity crowdfunding
- Interested in getting a business loan instead? Compare providers
- Bottom line
- Frequently asked questions
What is equity crowdfunding?
Equity crowdfunding is a way for businesses and startups to find investors online. It’s particularly useful for business owners and entrepreneurs who don’t have built-in connections to venture capitalists or angel investors.
Unlike a loan, you don’t have to repay the money you receive. And unlike other types of crowdfunding, you don’t need to offer rewards for different levels of donations. Instead, investors provide funds in return for partial ownership of your business.
How does equity crowdfunding work?
Equity crowdfunding platforms work by connecting business owners with investors. First, a startup or business owner sets up an online profile with details about the business and its finances. This might include:
- Company overview
- Elevator pitch
- History of financing
- Pitch deck
- Business plan
- Profile of business owners
Once your platform is finished, set a fundraising goal and an end date and launch your campaign. Potential investors registered with the platform can log on and view your profile. If they’re interested, they’ll follow the platform’s procedures for drawing up a deal and investing in your business. At this point, many platforms take a percentage of the funds raised as a fee.
How long does it take?
Unlike rewards-based campaigns, equity crowdfunding campaigns typically don’t have a limit to how long you have to raise your funds. You can take a few weeks, a few months or even years to reach your campaign goal.
Some platforms might cover the upfront costs of your campaign, while others expect your business to come through. If you decide to withdraw your campaign before reaching your goal, your business generally covers those upfront costs.
Who can invest?
Both accredited investors and regular consumers can invest in businesses through equity crowdfunding. How much investors are allowed to put toward your business depends on the type of investor. Accredited investors, like banks or corporations generally don’t have any limits on how much they can invest. All other investors are limited to how much they can invest per year by their annual income and net worth.
How much can my business raise?
Businesses will have a maximum amount they can legally raise in a 12-month period from consumers through equity crowdfunding, according to the regulations in their province or territory. These limits could range from $250,000 to $1,500,000 per year. Check with your province or territory’s security laws to find out what the limits are.
If you’re working with accredited investors, however, you’ll likely be able to raise even more funds. These investors may be legally allowed to invest an unlimited amount of funds – meaning the amount they invest in equity crowdfunding isn’t regulated.
4 quality equity crowdfunding platforms to consider
Thinking about finding investors through equity crowdfunding? Get started by looking into these platforms.
CircleUp specializes in getting funds for businesses that offer consumer products in their early stages. It generally looks to work with businesses that make between $1 million and $15 million a year and are looking to raise between $1 million and $10 million in growth equity.
To sign up, your business has to fill out an application. CircleUp evaluates your application using a software called Helio, which determines whether you’re a good match for any of its investors. You can get started by submitting your information on their Get Started page.
Crowdfunder works with a network of over 12,000 venture capitalists and angel investors to help startups at most stages get connected with investors. You generally won’t be able to find financing for a brand new startup, however. You’ll typically do better if you’ve participated in an entrepreneurship program with incubators and accelerators or have had interest from other investors and customers.
You can create a private deal room for free and sign up for a fundraising plan to get connected with investors starting at $299 a month.
Vested is a Canadian-based crowdfunding platform helping start-ups gain investors across the country (excluding Ontario-based businesses). This is a good platform for businesses in the early stages of growth, as there are no minimum size requirements for a business to be eligible for the platform.
You will have to pay several fees throughout the process, including a 5% portal fee and a minimum 2.9% payment processing fee.
This is another Canadian-based crowdfunding platform, which is operated by an Exempt Market Dealer under Canadian securities legislation. Consequently, Frontfundr is able to provide investment advice. This platform is going to appeal to a range of enterprises, from those freshly starting up to more mature businesses.
The price to get on this platform can start at $4000 to cover due diligence and listing fees. Once the campaign closes, a minimum of 8% trade fee will also be charged.
How much does equity crowdfunding cost?
It can vary widely depending on which platform you work with. Some platforms only charge a fee after you’ve been funded, like a 8% of the investment amount, for example. Others might also charge an ongoing monthly fee as long as you have an account.
Another cost you need to worry about are the upfront costs of setting up and running a campaign. Keep in mind that some platforms cover these upfront costs or wrap them into their fees, but not all do. These costs can include:
- Escrow agent. Getting funds from an investor involves setting up an escrow account — where the money sits until the deal is done. It can get complicated, so some startups choose to hire an escrow agent to handle it.
- CPA. If your company doesn’t already have its financials in order, it might want to hire a Chartered Professional Accountant (CPA) to make sure everything is in top shape — or risk losing out on investments. These could cost anywhere from $150 to $450 per hour.
- Legal fees. Setting up an investor agreement and reviewing nay required forms takes some legal expertise. You won’t need to pay this if you have in-house attorneys. Otherwise, some platforms might require you to hire legal services. Depending on their level of experience, lawyers could charge between $200 and $500 per hour.
- Marketing. Investing in marketing isn’t a necessity, but having a killer video and infographics can help your campaign succeed — especially if you’re using a platform that allows both consumers and accredited investors to fund your business.
What types of businesses can benefit?
Equity crowdfunding could be most beneficial for any for-profit in its startup phase, especially those with founders that don’t have the connections necessary to get investments otherwise.
It’s not ideal for businesses that haven’t gotten off the ground yet, however. Some platforms have minimum revenue requirements. Others might ask that your business have a minimum valuation. Even if the platform doesn’t require this, you’ll still need to convince investors that putting money into your business will give them a good chance for a decent return.
Benefits and drawbacks of equity crowdfunding
Not sure if equity crowdfunding is right for your business? Weigh the benefits and drawbacks of using a crowdfunding platform to get financing.
- Made for startups. Most equity crowdfunding platforms are designed with the needs of startups in mind, unlike most business lenders.
- No credit check. Your personal credit score generally doesn’t come into play when you apply for equity crowdfunding.
- Get connected with multiple investors. You don’t have to worry about one investor not putting up enough funds to cover your startup needs.
- Helps you make connections. If you didn’t go to an Ivy League business school and don’t have an in with the top venture capital firms, equity crowdfunding can help get you profitable connections.
- You lose some control. Trading equity for funding means you’re losing partial ownership of your business. Rely on equity investments too heavily, and you could lose control of the direction your business goes.
- It takes some work. Between the pitch decks and paperwork you need to file to set up your business’s profile and stay compliant with governmental and provincial/territorial laws, equity crowdfunding might take more time and effort than your business can afford to spend.
- More regulation. You might need to keep those lawyers and CPAs on retainer to ensure your business is acting legally and to send regular financial reports to each shareholder.
- Upfront costs. Setting up an equity crowdfunding campaign can add up, and not all platforms cover the initial costs.
Interested in getting a business loan instead? Compare providers
If you’re looking to finance your business, a business loan might be a good alternative to equity crowdfunding. You’ll maintain full ownership of your business, and the process to get funding is comparatively easy – although it could be harder to qualify.
Check out business loan options below, and read our full guide to business loans for startups for more information.
Equity crowdfunding can help a startup get access to funding from multiple investors when they don’t have connections to investors already. In some cases, you might be able to get equity crowdfunding when you can’t qualify for business loans or other types of financing. While it’s typically more complicated than other types of business crowdfunding, it could be a great option for startups looking for large amounts of money they wouldn’t be able to raise from friends, family and fans alone.
Interested in more business financing options? Check out our guide to compare lenders and learn how it all works.
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