What is Equity Crowdfunding? How it works and where to get it

Equity crowdfunding is a rapidly growing trend in business financing, quickly becoming prevalent among startups and small businesses looking to raise funds without the involvement of traditional venture capitalists.

Unlike more established equity crowdfunding sites such as Kickstarter and Indiegogo, which offer primarily non-financial rewards in exchange for donations, equity crowdfunding platforms allow companies to offer equity stakes in exchange for investment.

Equity crowdfunding represents an exciting new opportunity for entrepreneurs looking to gain a foothold in the business world without navigating an often opaque and inaccessible labyrinth of venture capital and private equity firms.

Whether you are an aspiring entrepreneur or simply an investor interested in diversifying your portfolio, equity crowdfunding holds great promise for individuals at all levels of the business spectrum. This article will discuss equity crowdfunding in its entirety and where to get it if you’re a startup seeking investment.

What is equity crowdfunding?

Equity crowdfunding is a relatively new approach to financing early-stage startups that differs from more traditional forms of fundraising like venture capital.

Unlike the more traditional methods, which typically involve submitting a business plan to an established venture capitalist and expecting the investor to own a stake in the company, equity crowdfunding involves tapping into large networks of individual investors. This allows smaller startups to raise money quickly and involves less commitment than other investment methods.

One key difference between equity crowdfunding and traditional venture capital funding is the types of investors involved. In equity crowdfunding, various investors typically donate small amounts of money to startups for different kinds of returns or rewards. This provides entrepreneurs with resources they might not have access to through more conventional channels while also giving individual investors more options for investing their money.

Equity crowdfunding has helped countless startups get off the ground and grow into successful businesses by opening investment opportunities to a broader pool of participants.

Some key benefits of this innovative funding model include:

1. Equity crowdfunding allows startups to access much-needed financing without going through the traditional route of seeking out investors. By engaging a larger pool of potential backers and building a network of supporters, startups can increase their chances of success.

2. Equity crowdfunding for startups gives entrepreneurs the chance to engage directly with potential customers and build connections with potential partners. This allows them to gain valuable insights into market trends and consumer preferences. It ensures that they create products and develop business strategies according to their target audience’s wants and needs.

3. Equity crowdfunding provides startups with valuable support beyond just funding. Entrepreneurs can receive advice, feedback, insights, and assistance throughout their journey by working closely with investors and other backers. Not only does this help them succeed in the short term, but it also helps set them up for long-term success by ensuring that they stay on track and continually adapt to meet changing needs and trends in their industry.

Cons of equity crowdfunding include:

One of the most significant risks is that equity crowdfunding investments are relatively illiquid. It can be challenging to sell your shares if you need to cash out before the company goes public or is acquired.

Equity crowdfunding also dilutes the ownership stake of the founding team and early investors, which can lead to conflict down the road.

It’s no secret that equity crowdfunding is riskier than other investments since there’s no guarantee that the company could succeed. With these risks in mind, potential investors should carefully consider whether equity crowdfunding is right for them before providing investment.

How is equity crowdfunding different from other funding strategies like venture capital?

Equity crowdfunding is a type of investment funding in which individuals can invest money in exchange for an equity stake in a company. The main difference between this type of funding and other types of investment is that investors receive an ownership stake in the company, rather than simply donating money or receiving rewards.

Investor Perks

In many cases, startups will offer early bird rewards or additional perks for investor contributions, adding an extra incentive for potential backers to get involved.

By raising capital through angel investment and equity crowdfunding, startups can secure the funds they need, and gain invaluable support as they grow their business ventures. Equity crowdfunding offers an exciting opportunity for entrepreneurs looking to launch new businesses or expand existing ones.

How it works

A few different platforms facilitate equity crowdfunding, and each one has its own rules and regulations.

To begin an equity crowdfunding campaign, businesses must first register on a credible crowdfunding portal and provide detailed information about their company, including financial projections and fundraising goals. Individuals interested in investing can browse these profiles and choose which companies they want to invest in. Once an individual has invested, they will receive a percentage of ownership in the company based on their invested amount.

This method allows entrepreneurs to solicit small investments from a large group of individual investors, who receive equity in exchange for their contributions. This process is often quicker and more efficient than angel investing or private equity, making it particularly attractive for businesses just starting or looking to scale up quickly.

Equity crowdfunding campaigns are typically open for a set period. If the campaign does not reach its investment goal by the end of that period, the company will return all investments. However, if the campaign is successful, the company will receive the funding it needs to grow and develop its business further.

Ultimately, the most appropriate funding type will depend on the individual needs of each business owner’s unique circumstances.

How much money can you raise from equity crowdfunding?

Once the initial vetting process is complete, businesses can start raising money from the public through online campaigns on the portal. Depending on the amount being raised and the profile of potential investors, companies can typically raise anywhere from a few thousand dollars to several million dollars, as there is no cap on the amount you can potentially raise.

Calculate Risk and Reward

While many businesses find success by raising funds this way, it is essential to note that it comes with some risks. Prospective investors may be risk-averse or simply unable to afford to invest in every promising business they come across, making it challenging to meet your funding goals until the right investors come along.

However, if you can put together an effective campaign strategy and successfully engage potential investors, equity crowdfunding can be a powerful tool for raising funds for your business venture.

Who can invest in equity crowdfunding?

Equity crowdfunding is a way for investors to gain equity in businesses or startups by directly supporting them through equity crowdfunding platforms.

These platforms are comprised of accredited investors, otherwise, high-net-worth individuals, or wealthy corporations that meet a specific criterion before they can invest.

Understanding the differences between accredited and retail investors

Two distinct groups of investors include accredited and retail investors, both known to be active in startup equity crowdfunding.

Accredited investors tend to be more established, with more extensive portfolios than retail investors, and therefore present less risk for equity crowdfunding investments. These investors may be able to pool their resources together to invest in startups that they see value in. 

In contrast, retail investors may have less money to spend and may be more likely to invest smaller amounts into various startups at a time.

There are pros and cons to bringing in either type of investor when fundraising for your company. Still, accredited investors tend to have more experience in early-stage investing and better access to information from the companies they interact with.

Both types of investors can bring valuable support and insights to startup equity crowdfunding campaigns. So, it is crucial for entrepreneurs working with this funding model to ensure that their offerings are appropriate for the types of investors they hope to attract. While accredited investors still have more opportunities than retail investors, equity crowdfunding has created a level of equality previously unseen in investing.

Regulatory Changes

Since the Securities and Exchange Commission’s Regulation D and the Business Startups Act, retail investors have become much more able to participate in equity crowdfunding, allowing almost anybody to invest in new firms if they fulfill specific requirements. 

It sets minimum requirements for companies that want to raise funds through online platforms, and it requires them to provide certain information about their business. This can include details about the products or services they offer, their financial history, and their growth plans. 

Regulation D also mandates that companies disclose all the risks associated with investing in their business in a clear and straightforward language.

In addition to Reg D, there is Regulation A, which states that companies can raise up to $50 million from investors in a 12-month period. There are two tiers of Regulation A offerings: Tier 1 and Tier 2. Tier 1 offerings are capped at $20 million, and Tier 2 offerings are capped at $75 million.

Equity crowdfunding under Regulation A is different from traditional equity financing in a few key ways:

Supporters of equity crowdfunding argue that it gives startups and small businesses access to capital that they would not otherwise have. Critics say that it exposes investors to more risk than traditional equity financing.

This lower barrier to entry has opened equity crowdfunding up to a broader variety of potential investors and increased competition amongst equity crowdfunding platforms, resulting in better deals for those looking to invest their money this way.

How much equity do you give up in crowdfunding?

If you’re thinking about equity crowdfunding to finance your early-stage company, it’s crucial to understand how much equity you might give up.

The amount of equity you give up will depend on many factors, including the amount of money you’re hoping to raise and the valuation of your company. Early-stage companies generally offer more significant equity percentages to attract potential investors, whether from venture capital or private equity firms.

Shares May Get Diluted

As a result, equity crowdfunding can dilute your ownership stake in your company. However, it’s important to remember that equity crowdfunding is just one possible source of financing for your business. 

There are various other options available, and the best choice for your business will depend on your specific circumstances.

How does equity crowdfunding work from the investor’s standpoint?

From an investor standpoint, equity crowdfunding is a type of investment that allows them to contribute to the funding of early-stage companies. Unlike traditional forms of crowdfunding, which focus on raising funds for creative or charitable projects, equity crowdfunding is primarily intended for businesses trying to launch or grow their company.

For investors, this presents an opportunity to support new and innovative ideas while also taking on riskier investments that may have more significant potential for return. 

Additionally, investing in startups through equity crowdfunding can help diversify one’s portfolio because startup investments often carry less correlation with broader market movements than other assets.

As with any investment, it’s essential to do your research before putting your money into a company through equity crowdfunding. But for those willing to take on the risk, it can be a great way to get in on the ground floor of some exciting new businesses.

Understanding The Risk/Reward Ratio

The risk-reward ratio for investors investing in startups is often remarkably high. On the one hand, there is the potential for a significant return on investment if the startup is successful. However, there is also an increased risk of loss if the startup fails. As a result, investors need to consider the potential risks and rewards before investing.

Conduct Due-Diligence

Investors who want to participate in equity crowdfunding should begin by researching it in its entirety, meaning its employees, management team, and its financials. It’s also helpful to understand the risks involved in any investment, and crowdfunded investments are no exception. Doing your homework before investing can help ensure that you’re making a wise investment decision.

Investor Selection

Once an investor has been approved and has selected a company to invest in, they will typically receive some form of equity ownership in return for their contribution.

This can vary depending on the terms negotiated between the company and investors, but it generally provides some tangible stake in the business’s success. 

Additionally, early-stage companies that pursue equity crowdfunding as a means of funding may provide investors with perks or benefits, such as discounted products or early access to new offerings.

Companies that have found success through crowdfunding platforms

Companies that wanted to raise capital had to go through traditional financial institutions in the past. However, this is no longer the only option. Investment crowdfunding allows companies to solicit small investments from many people.

This can be a significant advantage for businesses that might not be able to obtain funding from traditional sources. In addition, it can also help to build buzz and excitement around a new product or service. Some of the most successful companies globally have found success through crowdfunding platforms.

As a result, this is a highly viable option for businesses of all sizes; with breakout success stories including:

• Oculus VR
• Exploding Kittens 
• Popsocket
• Glowforge
• Peloton

That said, although equity crowdfunding campaigns that raise millions of dollars get the most attention, not all equity crowdfunding investments are enormous successes. Many equity crowdfunding campaigns are much smaller scale but enable the entrepreneurs to build a sustainable business and generate a return for their investors.

Equity crowdfunding portals cater to different types of opportunities, and some are geared towards smaller, more manageable investments. These equity crowdfunding campaigns may not make headlines, but they can still be very successful.

Equity crowdfunding can be an excellent way for entrepreneurs to build a sustainable business. And for investors, equity crowdfunding can be a way to support companies that have the potential to generate returns. So even though not all equity crowdfunding campaigns are enormous successes, many still achieve their goals and provide value for entrepreneurs and investors.

At M Accelerator, we have seen many startups and entrepreneurs achieve success through equity crowdfunding. We also have companies going through the process currently, including The Fertility Circle, to name one. This company’s vision is to give its users the resources to feel connected, empowered, and supported throughout their fertility journey. They offer stand-out brilliant basics, including education, community, access to experts, and events for app users.

Whether you are an entrepreneur or an investor, M Accelerator can provide the guidance and support you need to make smart decisions about your investments or grow a successful business. 

Additional Resources

Crowdfunding has quickly become a popular way for businesses to attract investors. Some of the most successful companies globally have found success through a crowdfunding platform, making it an extremely viable option for businesses of all sizes.

The following resources can provide more information on equity crowdfunding:

• SEC: Equity Crowdfunding
• FINRA: Investor Bulletin: Equity Crowdfunding
• Crowdfund Insider: Equity Crowdfunding

Founders Cohort

The M Accelerator’s Founders Cohort is an excellent resource for startups looking to build the first deck and start navigating funding opportunities. All M Accelerator programs provide access to investment crowdfunding platforms and financial institutions, allowing entrepreneurs to raise capital from various sources.

The MA Startup Program offers cohorts with more developed companies and guidance on how to structure deals and negotiate with investors. As a result, the M Accelerator Startup Program is an invaluable resource for startups seeking to raise money. Join our Founders Meetings with dozens of founders that want to learn more about the fundraising journey!