Crowd Funding
Crowd Funding
Crowd funding enables businesses to raise money by selling shares to the public, usually via an online platform. Investors can put in very small sums and normally benefit from tax incentives such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme. In some cases businesses selling shares can control the size and pricing of the offer.
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The Informed Funding two-minute guide: Equity Crowdfunding
- How does it work?
There are several different models for equity crowdfunding in the market, but in essence all of them enable start-up teams and business owners to raise funds by selling shares direct to the public via online platforms. Businesses accepted by the platform will create a pitch that sets out their business case, trading history, financial projections, director profiles and – very importantly – a short pitch video. Pitches stay live for up to three months to enable investors to look at the documents, ask questions of the executive team via the website (which will publish the answers for all potential investors to see) and decide how much to invest.
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- How much can I raise this way?
The sums raised through equity crowdfunding tend to be below the level where a lot of professional investors would become involved. These are therefore more akin to “angel investments” carried out by wealthy individuals. At the start-up end of the market, offerings might range from £20,000 up to £150,000, while slightly later-stage businesses typically raise around £250,000 although share offers of well over £1m are becoming increasingly common. In addition, businesses that succeed in raising their initial target amount can choose to “over-fund” by selling additional shares on the same terms as the original offer.
- What are the advantages of raising money this way?
Equity crowdfunding involves a minimum of legal cost and due diligence, which makes it a relatively fast and cheap way to raise equity finance. In some cases, business owners are able to set both the size and price of the share offer on a “take-it-or-leave-it” basis, rather than having to negotiate them with the investors as would happen in a conventional angel funding round. However, some platforms insist that each share offer has a “lead investor”, usually one or more business angels or an early-stage investment fund. They will negotiate the terms of the offer that will then apply to everyone else who invests alongside them. Qualifying investments made via equity crowdfunding platforms are eligible for tax relief via the Enterprise Investment and Seed Enterprise Investment Schemes, which offer tax breaks of between 30% and 50%.
- What happens if I don’t reach my funding target?
If your pitch fails to make its minimum target within the time allowed, your business will not receive any money. A fairly high proportion of all pitches on equity crowdfunding platforms (around two-thirds according to research carried out by Informed Funding’s sister organisation, the Alternative Funding Network) do not reach their target.
- What does it cost?
Platforms usually take a percentage of successful fundraisings as their fee. This ranges from 5% to 7.5% and may also include an element of “carry”, otherwise known as a share in the investors’ profits on any successful exits. There may also be fees to pay for legal work in setting up shareholder agreements and the documents that will set out how the company is to be constituted and run.
- How much do I have to communicate with my new shareholders?
Again this varies according to which platform you go with. In some cases there is no ongoing expectation from the platform that the business will continue to communicate with investors, in other cases there is. However, many businesses that use equity crowdfunding choose to communicate with their new investors and treat them as an important group of advocates for the product or service that the company offers.
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Need to know:
- Some platforms enable everyone that invests to become a direct shareholder in the company, while others act as a “nominee”, in effect representing the group of individual investors and dealing with the company on their behalf.
- Companies raising funds this way often find it pays to have a group of “friends and family” ready to invest as soon as the pitch goes live so that it is able to show backing from the outset. Experience suggests that people are reluctant to be the first to invest in a pitch, so early support is crucial
- Similarly, having a larger number of people backing your pitch rather than just one or two (even if they are committing large sums) can make a difference.
- Equity crowdfunding does not let you choose which investors you accept, so it makes sense to ensure you attract some people with relevant knowledge, experience and contacts among your “friends and family” investors. That said, businesses that have succeeded in raising funds this way have frequently found that among their “crowd” on investors in any case are people with knowledge of their industry.
Expert Tips: Having a number of investors can mean that you can retain greater effective control. However, keeping everyone satisfied can be more difficult as investors may have different objectives e.g. capital growth versus a revenue stream.
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