7 Myths of Equity Crowdfunding
Startup equity crowdfunding, only a few years old, is still surrounded by myths and misconceptions. Some of the most common ones keep founders from raising from the crowd.
We wanted to get them out of the way.
Equity crowdfunding works for all different stages and types of companies, including those who have already raised angel or venture funding.
There are two core benefits to equity crowdfunding:
- First, you can raise money. Companies of all stages do this.
- Second, you gain loyal customers and brand ambassadors, build the brand and share the value of your startup with your ecosystem. Companies of later stages need this just as much.
More and more later stage startups are realizing this:
Roomi, a company with $16M raised and 14x growth in 2016 recently ran a campaign on Republic as a way to acquire new customers and develop long-term relationships with users.
Pearachute, who raised $250K on Republic this spring and also raised from TechStars Ventures, Chicago Ventures and others, used equity crowdfunding as a way to share in their success with customers and small business partners.
For Series A or later stage startups, an equity crowdfunding raise could be part of a larger round.
If you do it on your own, it might get overwhelming, but that’s where the platform’s expertise comes in: we have figured out the most efficient and founder-friendly way of complying with all the regulations.
What are some of the “worst” regulations?
- Disclosure regulations
The most complex part is filing a disclosure document — the Form C — that includes a snapshot of your company’s finances.The good news is that the Form C can be filled out with a bot system, like iDisclose, in a few hours. You don’t even need to have an in-house CPA or attorney.You don’t have to provide an annual tax report. Your sole requirement post campaign is filing a simple Form C-AR and posting it on your website 120 days after the end of your next fiscal year. Bonus myth! Some fear having to go through a financial audit, but this is unfounded: it is only required (sometimes) if this is not your first time raising via equity crowdfunding.
- Advertising regulations
The rules only say that you can’t advertise your campaign before it launches. After you launch the campaign, you can advertise as much as you want, with some small limits involving including deal terms in your ads.
Just the opposite! A successful equity crowdfunding raise proves that your customers stand behind you. Venture capitalists see this as a competitive advantage and as a strong signal.
Simon Cook, Executive Director of Draper Esprit, wrote:
“VC firms like ours are changing in several critical ways. The first change we’re making is to regularly invest alongside the crowd . […] This enables those of you investing using platforms to invest in a company which is also being buoyed by the networks, management advice and guidance of a seasoned VC. This is surely a win-win for everyone.”
Top VCs recognize equity crowdfunding’s value:
“Equity crowdfunding gives entrepreneurs access to a new group of investors who might be great assets to their business. I welcome investing in crowdfunded companies. It means that a company has a large number of promoters before I even invest.” (Tim Draper)
“…to raise capital an entrepreneur has to know VCs or someone who knows VCs. Distribution is closed off and secretive. Equity crowdfunding is quite the opposite: it is global, open, instantaneous, and non-discriminating for both sides of the marketplace.” (Jason Heltzer, Origin Ventures)
Fred Wilson predicts that “crowdfunding platforms will bring in 10 times that of what VCs bring in annually”.
Equity crowdfunding does not have to leave you with a “messy” cap table. Republic has created and open-sourced the Crowd Safe™ — a fundraising instrument that allows to raise from hundreds of investors and still have a single line item on their cap table.
A Crowd Safe does not expire or accrue interests. It only converts into special securities if there is another financing round and you choose to convert Crowd Safe holders or cash or equity upon an IPO or the company’s acquisition, preventing alterations to your cap table for the considerable future.
It is up to you to decide on the terms of the conversion like the valuation cap and discount rate. Also, with a Crowd Safe, there is no expiration or maturity date — so you don’t have to deal with revising interest rates or the like.
From a securities law perspective, equity crowdfunding is different from other types of securities offerings: it won’t combine or interfere or prevent your from pursuing other fundraising methods.
It’s a stretch for a single founder to do a VC raise at the same time as the campaign, but they are not mutually exclusive for any reason.
In fact, high-profile investors will see a successful crowdfunding campaign as a strong positive signal, which will make closing your VC/Angel round easier (see myth #3).
There are costs to doing a campaign, but to raise up to $1,070,000, you need a few thousand dollars. It would cost you as much time and money to hold and attend numerous investor meetings.
Only the following costs are required for all startups to comply with equity crowdfunding regulations:
- $1,500 for iDisclose to create your Form C.
(You could opt out of using iDisclose, but it would cost you much, much, much more in legal fees)
- $1,500 to have an escrow account which is required to host a campaign.
- Funding portal fees. Republic charges 6% of the cash proceeds, and receives a Crowd Safe equal to 2% of the total amount raised (not 2% of your company). You pay these fees only if you succeed.
You might incur a range of other costs:
Accounting costs depend on how complex and well-kept your financials are. If you have a licensed CPA on the team, your costs can be zero.
You can spend as much as you choose on the video production and marketing, starting from $0. To raise a larger round, startups typically spend more on marketing, but it’s money well spent: you’re acquiring investors and loyal customers!
If your company has a complex history, you may want to have an attorney review your Form C before you file, we can introduce you to specialists who charge low fees and know what they are doing.
Compared to the time spent raising venture capital, your effort goes to growing and strengthening your business, instead of one on one meetings. (Speaking of comparing a crowd raise to a VC raise, see: Equity crowdfunding or VC? Pros and cons compared)
Other advantages of raising with crowdfunding are:
- Aligned financial interests with your community and partners
- Exposure — a public campaign attracts attention from media and your industry
- Social proof — demonstrate public support for your mission
- Engagement — when your customers invest, they’ll be invested in your long-term success
Spending time on equity crowdfunding is spending time developing the relationship you have with existing customers, acquiring new customers and marketing your business.
What concerns do you have or have you heard about? We’d be happy to discuss.
Originally published at republic.co.