Imagine you’re on an episode of “Shark Tank,” but instead of cameras, pressure, and scripting, you create an online campaign and share it with your community. And, of course, get some startup funding (a.k.a. seed capital) along the way! Pretty cool, right? We think so, but there are some deets we’d like to cover about this method.
What is this magical alternative you might ask? Crowdfunding. It is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet (e.g. social media and crowdfunding platforms). There are two types of crowdfunding platforms out there: those utilizing investments that grant equity to the people who contribute money and those utilizing contributions that provide perks to the people who contribute money. These two types are outlined below and the distinction is quite important.
** Before you continue: be aware that crowdfunding platforms are for contributions to for-profit ventures. Therefore, crowdfunding does not deal in “donations” — those are things of nonprofit-land (i.e. “donations” to a charitable endeavor that allow the donor to write-off the amount on their taxes). Platforms such as GoFundMe and Kiva tend to focus on these types of philanthropic/charitable “donations.” Okay, now you may proceed.
Investments for Equity
Let’s get this one out of the way — it is the most complicated model. “Equity crowdfunding gives investors the chance to invest in a startup or existing company by purchasing a percentage of ownership in a company.” In many ways, investors are taking a gamble because the ownership or stock they received in exchange for their money may end up being worthless if the company is not successful; as a result, there are a number of legal regulations surrounding equity-based crowdfunding.
These types of investments typically involve contractual agreements between the entrepreneur and the investor to set expectations, provide clarity on the investor’s role in the company, and shape the relationship (usually pursuant to the investor’s terms, depending on the relative bargaining power of the parties). Again, think of the “shark tank” scenario.
Contributions for Perks
Of the common crowdfunding platforms below, all prohibit granting of equity for contributions.
For a mental image: think of the proverbial Santa Claus ringing his bell outside of grocery and department stores to raise money for a good cause. The Internet, it seems, is now Santa Claus because this sort of crowdfunding focuses on the contribution itself as the goal. Contrast that with an investor saying to herself: “Now that I gave this company money, what’s in it for me?” (a.k.a the bring-on-the-benjamins! mindset that often plagues investors).
These models often give some sort of small perk to contributors that can increase in value and/or awesomeness in proportion to how much money the contributor gave to the company. For example, a postcard addressed to you might be what you get when you contribute $1 to the company, but if you contribute $100 you might be the first to get the new product they’re raising funds to manufacture. Giving the funder a perk of some sort is usually a marketing tactic to either attract socially conscious people who may be hesitant to part with money, or galvanize a new base of customers who may have not otherwise been familiar with your products or services.
All of that in mind, let’s sum it up as follows: contributions for perks do not deal with grants of equity in the company being funded, but instead play off the charitable nature of contributors (or their desire to get a product, i.e. the perk, before anyone else) by offering perks in return for their contribution. Paramount to this model is the idea that the contributor needs to be OK with the idea of forking over money in a company without any monetary gain in the form of equity or tax write-off incentives.
Crowdfunding Platforms At Large
Now that we have the basics, let’s look at some real-life examples of crowdfunding platforms. There are dozens of online crowdfunding platforms with various terms, advantages, and drawbacks, so it is a good idea to shop around. On a simple Google search, Indiegogo, Kickstarter, and GoFundMe tend to get the most coverage and attention. The breakdown of these platforms is below.
Indiegogo claims to be a “launchpad for entrepreneurial ideas.” To do this, the platform offers an “all-in-one” approach, which consists of: both fixed and flexible funding options, marketing and promotion tools, integrated analytics, mobile management, and support services. The first step in this process is to download the “field guide,” which helps the entrepreneur develop a campaign for their idea/product. Indiegogo charges entrepreneurs 5% for the platform and 3% for credit card processing fees.
For nonprofits and “socially minded” projects, Indiegogo created a variant called Generosity. The key element of this secondary platform is that a 0% fee is charged. Through a “compassion, not fees” model, this variant allows individuals to raise money for charities, education, emergencies, medical issues, and various other projects that are not necessarily business- or entrepreneurial-related.
Kickstarter claims to “help bring creative projects to life,” with a strong emphasis on “creative” throughout the website. To secure adherence to this end, Kickstarter projects are screened using the following criteria:
- Projects must create something to share with others;
- Projects must be honest and clearly presented;
- Projects can’t fundraise for charity;
- Projects can’t offer equity; and
- Projects can’t involve “prohibited items,” which can be found here.
Similar to Indiegogo, Kickstarter collects 5% for each project; however, fees are only collected if a project is “successful.” The entrepreneur can set a target funding amount and a target timeline for that amount; the project is deemed “successful” if it meets these targets. In addition, Kickstarter’s pledge processing system charged 3-5% for each pledge. Included in the service is a “tracker” function that provides basic analytics.
GoFundMe claims to make asking for money easier. This platform is very broad and does not seem to limit what a fundraiser can be; however, the top categories are medical fundraising, memorial fundraising, and charity fundraising. GoFundMe also has a “goals” feature (like Kickstarter), but donations received are maintained by the fundraiser even if the goals are not met (unlike Kickstarter). Just as the other platforms, 5% is deducted from the total funds raised and there is a 3% processing fee for credit cards.
Whether you are an emerging business venture, an existing business needing some capital, or just an individual with funding challenges, crowdfunding is a diverse and relatively simple method for achieving your monetary goals.
By: Zachary Avina – 07/12/17
- Raising Money for Your Business: A Primer
- Capital Accounts . . . a.k.a. I Have a Headache
- 3 Common Vesting Schedules for Startups
Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing should be taken as legal advice. Reading this article does not form an attorney-client relationship with us. An attorney-client relationship is formed through a signed engagement agreement. If you would like further information, wilkmazz pc would love to help you out! Feel free to reach out with any questions.