Equity crowdfunding is a new phenomenon, so it’s understandable that it draws some skepticism from those more comfortable with a more traditional venture capital path.
You might be wondering whether it’s necessary if you already have a solid network. Expanding into a crowdfunding portal will allow you to reach a broader network of proven investors. If you’ve already tapped your personal connections, this can make portal investors even more eager to get on board.
Other entrepreneurs are worried about equity crowdfunding somehow decreasing their legitimacy. That worry is misplaced. Websites like Fundable and Onevest have already helped numerous businesses and startups raise capital successfully in this way. Equity crowdfunding actually raises 40 times more per company than any other type of crowdfunding.
Equity crowdfunding can help you reach a broad pool of qualified investors, showcase your opportunity in a compelling way, and raise the capital you need without a negative effect on your legitimacy.
Choosing the Right Platform
Crowdfunding portals have made issuing equity easier than ever before, but there are hundreds to choose from. Separating the wheat from the chaff can seem overwhelming if you don’t know which key factors to look for.
What are some signs of top-quality platforms? Look for:
- A comprehensive screening process
It’s better if your portal is selective when qualifying issuing companies. This helps keep only the best opportunities in front of investors, which makes them more likely to follow through when something catches their eye.
- Proven track records of success
How many companies have met their funding goals through that particular portal in the past? This is a testament to the quality of that portal’s processes, as well as the investors who use it.
- Robust levels of reporting
The better prepared the issuing companies, the more confidence the crowd will feel when offering capital. Look for portals that display information beyond the bare minimum to comply with the law to ensure the most transparent transactions possible.
- Strong fraud-prevention policies
- Vetted investors
Portals that list more investment opportunities aren’t necessarily better. These portals are often overwhelmed with the sheer amount of data they have to handle, so they aren’t able to devote the same level of personal attention as a portal that’s more selective with its issuers.
At Equity Round, we take the selective approach. We offer an exclusive set of opportunities and get deeply involved with every company listed on our portal. Our investors can browse these opportunities with full confidence that they’ve been carefully screened and vetted.
Issuing from the right equity crowdfunding portal will help you connect with the right pool of investors…
But it’s no replacement for a personal understanding of key equity crowdfunding concepts. The better you understand these things up front, the better you’ll be able to steer your equity funding rounds to success:
Equity is partial ownership interest in your company. It’s different than debt financing or peer-to-peer lending because you’re enticing people to invest in your business not with interest payments, but the prospect of future performance (through dividends and appreciations).
In short, equity is a partial stake in your company – and the stock that comes with it.
What Is Dilution?
When you take equity investment from investors, you’re issuing partial ownership interests in your company. That means your ownership percentage decreases as investment increases. The more people sharing the ownership pie, the smaller the pieces everyone gets.
It’s important to consider how much total dilution you’re comfortable with as you plan your round(s) of equity crowdfunding.
The goal is to own a smaller percentage of your company, as long as it’s much larger and more valuable. There’s a fine balance between giving up too much control and raising the capital you need to thrive.
How Do You Issue Stock?
American companies can issue stock in a few different ways:
Initial Public Offering (IPO). The IPO is the process of “taking the company public” and listing it on national stock exchanges. The IPO is the first sale of stock by a private company to the general public. To do this, you have to hire an underwriter and satisfy a wide range of legal requirements, such as audits and registering with the SEC. This can be too costly and time-intensive for early-stage companies just looking for a little capital.
Regulation D Offerings. Regulation D covers special situations where a business is exempt from having to register with the SEC. In these situations, you can raise capital by issuing equity, but there are stringent requirements about whom you can offer it to, as well as investor sophistication requirements and restrictions on stock.
Equity crowdfunding. Offering partial ownership via a crowdfunding portal (will soon be available to both accredited and non-accredited investors in early 2016).
Why Understanding Equity Is Critical
Some business are so eager to raise capital they neglect long-term value for a short-term infusion of cash. Because equity represents ownership in your company, you don’t want to dilute that ownership too heavily in the funding process.
Remember, shareholders get rights and have a stake in how your company operates – much more so than debt financiers. It’s important to raise enough money, but to do so in a sustainable way to avoid ending up overwhelmed.