Equity crowdfunding

Description

Equity crowdfunding consists of selling a stake in your business to a number of investors in return for investment. The existence of equity funding is well established, with private equity, venture capital and angel investing long playing a role in developing companies. The main difference between equity crowdfunding and these traditional models is that, rather than establishing a one-to-one relationship, it is offered to a wide range of potential investors, some of whom may also be current or future customers. Equity crowdfunding does this by matching companies with would-be angels via an internet-based platform.

Key features

• You will have to set the terms, and choose how much you want to sell, the price and how investors will be rewarded. It requires good expertise to value a venture correctly.
• The fees payable for raising equity finance on the crowdfunding platform will typically be a success fee and legal or administrative fees related to the issue. You may incur additional legal and advisory fees.
• Many people can invest, so you can have lots of small co-owners, instead of few large investors. It is usually less costly than being listed on the stockmarket.
• You need to show that your business is investment-ready, thus you need to produce a business plan and financial forecasts. You should also have a good communication strategy, with the most important information about your project readily available and easily understandable to potential investors.
• Due diligence is usually carried out by the platform and the investor may have the option to ask for more information, and you should be prepared to provide this information even if it comes at additional costs to you.
• There are serious legal aspects, the costs of which you should not ignore, such as disclosure and legal documents, annual general meetings with shareholders, processing corporate rights, annual reports and decision procedures.
• Investors’ rights can vary. However, typically shareholders have voting rights on key matters of running the business, issuing new shares, etc. You should consider how much of the control rights over your business you are ready to give to external shareholders. As regards compensation, be aware that investors may claim damages to compensate money loss incurred, for instance as a result of breach of contract.

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