Crowdfunding: Equity, Debt, or Revenue Interest

 

Equity-based Crowdfunding generally occurs whenequity-based crowdfunding an investor receives an ownership interest in the company in exchange for his or her investment. However, there are other regulated securities transactions that a business can use. For instance, a business with predictable revenue (and cashflow) could opt to use a debt instrument. Still, other businesses may choose to use an agreement that acts as a royalty stream, a percentage of revenues is promised.

Equity = Owner

The investor becomes a shareholder in the company. Depending upon the type of shares/ownership interest the investor may be able to vote on strategic decisions. In most instances, the investor has the ability to sell his or her share, all or part of it, in the future at market value.  Furthermore, the investments are at risk as with any other investment.  Note that the level of investment allowed for accredited and non-accredited investors differs. See accredited and non-accredited investor.

Key Points for Equity Ownership:

  • The offer is equity shares (common or preferred stock, LLC membership interest) in return for capital investment
  • The funders become owners.
  • Businesses that can demonstrate progress against a plan (timeline and milestones), have demonstrable growth, or can identify a well-documented, large market opportunity, are the best match for ownership-based offers.
  • The business has to be willing and able to manage investor relations, maintain required communication and reporting to investors.

Debt-based Offers

Debt-based investment in your business requires a commitment to repayment of the funds according to a set schedule, interest rate, etc. These funding agreements are similar to traditional bank loans that most businesses are familiar with. The advantage of debt-based crowdfunding is that no ownership interest is given. The challenge is ensuring that the funds are available when and in the amount that is to be repaid. Consequently, debt-based agreements are best suited to businesses that

  • want to retain ownership
  • have a predictable revenue (and cash flow) stream
  • are established with a history of performance.

“Royalty” Stream Agreements

Royalty crowdfunding provides funders with a percentage of revenue from the project or business, once it is generating revenues.

SEC Crowdfunding Bulletin

OUR PROGRAMfocus-paces-program-2planning

The Pre-launch Module guides you through the critical success factors, the timeline, and the who, what, when, where, how, and how much of your campaign.  Pre-launch is the planning and development phase of your crowdfunding campaign. This includes:

  • business plan
  • determining the amount you need to raise
  • the type of offer you will make (royalty, equity, debt)
  • the terms and conditions
  • the pitch – book, deck, and video
  • and all the other critical information needed to succeed.

 

Duringacquire the pre-launch phase of your campaign, you will be working on the Audience Module also. The Audience module is all about building visibility for your business before your campaign ever starts. This module addresses two elements of Audience. First, we address building your business visibility and credibility before you start pursuing funding. Note with regulated crowdfunding, there are specific regulatory restrictions and specifications that spell out what you can say and where you can say it.  They also specify to whom you can make the pitch (offer), as well as when you are allowed to do it.

It is critical to your success to build your audience, your crowd, before you pursue crowdfunding. This crowd building process is not directly about the campaign to raise funds. In fact, it does not connect directly to your fundraising efforts. In fact, it CANNOT for regulatory reasons. So why invest time, money and resources in building a crowd before your crowdfunding efforts? Because this crowd can become the foundation of your crowdfunding campaign later.

The audience consists of;

  1. customers
  2. vendors
  3. colleagues
  4. social media followers
  5. qualified investors
  6. media
  7. others.

Crowdfuncampaignding Campaigns are the main event where you make your offer to the crowd.  The campaign requires diligence, a continued push to get visibility with potential funders, and a time to answer questions and interact with interested investors. The Campaign period is not a time to rest. Instead, it is time to engage in allowed activities that keep up the interest, bring in potential new investors, and drive toward success.

 

Thexecuteroughout your crowdfunding process, you have to execute.  You have to make things happen  There are many critical elements to a successful funding effort. Some of these items are what are known as “gating” items. Gating means that if they don’t happen at the right time and place, your entire campaign timeline and success is put at risk. These items frequently include:

  • the video
  • the business plan
  • regulatory filings, and
  • audience building activities.

The Structure of your offer and the regulastructureted elements of that offer require detailed decisions. They also require you to make the decision on what type of relationship with funders is best for your business. The decision you make will contribute to the success of the offer and to the long-term success of the business. There are pros and cons to each regulated crowdfunding option – from a legal and a business standpoint.  We explore each of the crowdfunding types, analyze your business for impact, and determine what changes need to occur in the business before you engage in the crowdfunding process and what will need to change operationally going forward to maintain compliance after the deal.

 

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Articles and Podcasts

  • Imperfect Pitches You Can’t Make Them … or Stop Them (8/28/2016) by Lea Strickland - Tough Lessons: You Can’t Make Them … or Stop Them Parents know it and live it. Consultants and other advisors have to learn it. You can’t force anyone to make a wise choice or the best decisions. You can't stop companies from making imperfect pitches to potential investors. Sometimes people just have to learn the hard lessons, the life lessons, themselves. Yes, it is painful to watch and to experience. It feels like watching an accident happen. You see the person stepping in front of the oncoming train, and you are shouting “Don’t do it!” and still they take that ...
  • Crowdfunding: The Taxman Cometh (8/25/2016) by Lea Strickland - Crowdfunding - Category Determines Taxation Crowdfunding, like campaigns you see on sites like Kickstarter or GoFundMe, can essentially be categorized into three types of transactions: Equity investment – the funds received purchase ownership interest. Gift – the funds received are given with no expectations of a return and a token gift is given in return (e.g., a t-shirt or mug) Income – money received for your work. What most crowdfunding groups or individuals forget to consider are the tax implications of their efforts. It’s crucial that you can answer the following questions about the proceeds from your crowdfunding: What category ...

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