How Does Equity Crowdfunding Differ from Other Types of Crowdfunding

Equity crowdfunding is a unique breed, and it's essential to understand how it differs from other types of crowdfunding. Unlike donation-based crowdfunding, where you're essentially giving money to a cause or project, equity crowdfunding involves investing in a company in exchange for ownership.

Equity crowdfunding platforms, such as those mentioned in the article, allow individuals to invest in startups and small businesses, providing them with a potential source of revenue. This is a stark contrast to rewards-based crowdfunding, where you receive rewards or products in exchange for your investment.

One key difference between equity crowdfunding and debt crowdfunding is the level of risk involved. Equity crowdfunding carries more risk, as you're essentially betting on the success of the company, whereas debt crowdfunding provides a fixed return on investment.

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Equity crowdfunding is a method of raising capital for your company by soliciting small individual investments from a large number of people, including via the internet or social media.

These investments are in exchange for equity or a share of the company, which is a key difference from other types of crowdfunding. Equity crowdfunding is a more conventional capital-raising method that offers financial securities to investors.

Unlike donation-based or rewards-based models, equity crowdfunding allows investors to own a piece of the company. This means that in equity crowdfunding, you get working capital, and the crowd gets a piece of the company.

The companies raising funds through equity crowdfunding are at different stages of the business lifecycle, ranging from early idea stages to generating millions in revenues.

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There are four main types of crowdfunding. Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors.

Crowdfunding can be done online via social media and crowdfunding platforms, which leverages the networks of individuals for greater reach and exposure. This collective effort taps into a large pool of individuals.

These four types of crowdfunding allow creators and entrepreneurs to choose the best approach for their needs.

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There are four main types of crowdfunding.

Donation-based crowdfunding is one of them, where there's no financial return to investors or contributors, and it's often used for fundraising for disaster relief, charities, nonprofits, and medical bills.

This type of crowdfunding is perfect for causes that need support, but don't offer any financial rewards in return.

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Lending-Based crowdfunding allows entrepreneurs to raise funds in the form of loans that they will pay back to the lenders over a predetermined timeline with a set interest rate.

This type of crowdfunding is ideal for entrepreneurs who need a short-term loan to cover specific expenses or take advantage of a business opportunity.

Lending campaigns tend to take place over a shorter time span of around five weeks, which can be a huge advantage for entrepreneurs who want to get back to running their business quickly.

By choosing lending-based crowdfunding, entrepreneurs can avoid giving up equity in their startup, which is a major plus for those who value their independence.

Direct investment in a startup on a crowdfunding platform is a rare option, typically used when an investor puts in a large check, allowing them to bypass the Special Purpose Vehicle (SPV) method.

This method helps founders manage their cap table, but it comes with a catch: investors will have to pay carry during exit.

Investors have the option to invest directly in a company through a product used by most platforms, except AngelList, where they pool their funds into a company-specific fund.

This fund is then invested as an SPV, giving investors the flexibility to opt out if they choose to.

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Equity crowdfunding platforms have made it possible for individuals to invest in startups and small businesses, regardless of their net worth or income level. Before 2015, equity crowdfunding was limited to accredited investors.

AngelList is one of the largest equity crowdfunding platforms, having invested $163M in 441 startups in 2015. It operates on a crowdsourced, syndicate-led model, with accredited investors participating in deals.

Funders Club, on the other hand, runs a centralized model, presenting deals centrally and offering a more uniform experience for investors. It has a carry of 20 percent and a one-time administrative fee, with no annual management fee.

Wefunder is another equity crowdfunding platform that initially catered to accredited investors but is now open to non-accredited investors under Title III. It has a favorable platform term of 20 percent carry, with charges of 6 percent to founders and 2 percent to investors.

Investors on these platforms can expect varying levels of access to founders, with AngelList offering good access and Wefunder offering limited access. Minimum check sizes also vary, ranging from $1k to $25k or larger on AngelList, and a uniform $3k on Funders Club.

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AngelList is the largest platform out there, aiming to democratize the funding of startups. It invested $163M in 441 startups in 2015, with over 3,300 investors participating in these investments.

The platform model is crowdsourced and syndicate-led, catering to accredited investors. This means you can get access to some of the very selective deals that are absent on other platforms, but the quality of deals varies from syndicate to syndicate.

AngelList has a wide range of deal types, including industry-specific syndicates and general syndicates, giving you plenty of options to choose from. However, the quality of deals is not always high standard, and you might get bombarded with deals that aren't that strong.

The platform terms are usually around 20 percent, with 5 percent going to AngelList and the rest to the lead syndicate. There's also a one-time fee to set up accounts, but no annual management fee.

The terms of deals depend on the valuation of the company, with companies ranging from early stage to late/growth stage. The terms of share type, pro rata, and other factors also depend on the negotiation between the syndicate lead and the company.

AngelList offers many different types of products on the platform, including industry-specific funds, syndicate models, and companies raising without a syndicate. It's also becoming a hub for talents and a recruitment platform for tech resources.

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However, the analysis and commentary on deals are not always comprehensive, and the information structure is not uniform. You might not get detailed information about the deals, and the administrative support is not always consistent.

Despite these limitations, AngelList provides good access to founders, and in most cases, you can reach out to them to ask questions. The minimum check size varies from $1,000 to $25,000 or even larger, and you can expect to find many big-name investors investing alongside the raise on the platform.

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Crowdcube is the largest equity crowdfunding platform based in the UK. It raised £83,060,180 ($105m) for 166 pitches in 2015.

The quality of deals on Crowdcube is mixed, with some high-quality deals featuring investment from institutional investors, but many others not so much. The platform's terms are highly favorable to investors, with no carry.

Mostly early-stage deals are listed on Crowdcube, and the terms of these deals vary depending on the company and size of the investment. You can either get Type A or B shares.

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Crowdcube provides good quality information about the deals, and there's an active Q&A section where investors can ask questions to founders. You can also reach out directly to founders for more information.

Investors have high access to founders on Crowdcube, as they can arrange a direct call or reach out through the Q&A section. The minimum check size on Crowdcube can be as low as £100.

However, the quality of co-investors on Crowdcube is usually limited to early money from individuals, with few institutional co-investors. The platform doesn't provide regular updates on the companies being funded, and the structure varies depending on the founders.

Equity crowdfunding offers several benefits to companies and investors alike. A successful campaign can provide a company with momentum and a proven ability to raise money, which is a validation of their business idea.

Control is another advantage of equity crowdfunding. Entrepreneurs can dictate the terms of the offering, giving them more freedom and autonomy in the investment process.

Equity crowdfunding also provides a sense of community. Investors not only provide capital, but also serve as brand ambassadors, loyal customers, and members of an organic community invested in the company's success.

Here are some of the benefits of equity crowdfunding:

Equity crowdfunding offers a range of benefits to both companies and investors. By introducing a new approach to investing and capital-raising, it can provide momentum and a proven ability to raise money.

A successful crowdfunding campaign can validate your company's ability to raise funds, giving you momentum and a sense of accomplishment. This can be a huge confidence booster, especially for startups or small businesses.

You have control over the terms of the offering, dictating how the investment will work and what the investors will get in return. This is a big advantage over traditional financing, where you may have to negotiate with institutional or angel investors.

Equity crowdfunding investors can become brand ambassadors, loyal customers, and members of an organic community invested in your success. This can lead to a loyal customer base and a strong reputation for your company.

Here are some of the key benefits of equity crowdfunding:

One of the biggest advantages of equity crowdfunding is that it reduces management pressure.

Unlike traditional financing methods, equity crowdfunding doesn't result in a dilution of power within a company.

This is because the involvement of a large number of investors means that power is not concentrated around a particular group of shareholders.

As a result, management has more freedom to make decisions without being beholden to a small group of investors.