June 2018 . . . If you run a business and are looking for investors to back your vision, equity crowdfunding can be a great way to raise capital. You can raise up to $2 million by offering shares in your company to your “crowd” of customers, suppliers, fans and supporters. But it’s not for everyone, and it’s worth knowing what you’re getting yourself into.
If you’re considering running an equity crowdfunding campaign, we’d suggest you start by asking yourself three questions:
These questions aren’t exhaustive, but if you can answer them confidently, you’re off to a good start.
Is crowdfunding right for you?
The right type of business
Equity crowdfunding is ideal for some types of businesses. From experience, you’ve got an advantage if you have:
If you’re not in either of those spaces, you can still succeed by presenting a solid and promising investment opportunity – with a good understanding of who your likely investors are (more on that below).
The right time for you
The right timing is also vital. We’ve seen businesses fail to meet their crowdfunding targets (and suffer a hit to their reputation) – largely due to them going to the crowd too early. Investors want to see your story. Not just what you’re doing and why, but how you’ve grown, and how you’ve used previous funds. In some situations, you may need to start with a smaller, private capital raise. This validates the business, and can show that crowdfunding is the logical next step.
Luckily, there’s a range of capital raising options to consider before leaping straight to equity crowdfunding, including:
These can often be cheaper and easier than a full equity crowdfunding raise.
The right risks
Even if you’re sure you’ll be able to raise your intended amount, there are still dangers. You’ll be opening up your business to customers, suppliers and competitors (so ensure you protect any trade secrets!). The increased publicity can also be a double-edged sword – as any subsequent problems may well also get more attention.
Have you got the right crowd?
If equity crowdfunding is the right choice, you’ll need to have the right crowd. This isn’t a “build it and they will come” situation. You really do need to ensure you have at least some backing lined up. Some crowdfunding platforms may even insist you have a certain amount (e.g. 30%) of your funding pre-committed, before you can sign on with the platform.
Many businesses fall into the trap of thinking that simply having customers and people who like your brand will be enough. But you need to drill down deeper, and really validate your assumptions. Talk to people; see if they’ll put their money where their mouth is.
Don’t forget to ensure your internal crowd is right for the job. Beyond your immediate team, you’ll need to pick an equity crowdfunding platform that suits your business and type of raise. Each platform has different strengths, so take some time figuring out which is best for you (looking at past campaigns is great for this). And remember your team of helpers and advisors. Lawyers and accountants are a must – preferably people that can understand both your business and the “ins and outs” of equity crowdfunding.
Are you prepared for success?
Prepare, prepare, prepare
The most important part of any capital raise is the preparation – especially when it comes to equity crowdfunding. Going from a small team of founders to hundreds (or thousands) of shareholders can be a steep learning curve. And there are some things that can’t be easily fixed after the raise. Professionals – and the platform – are vital here, as they should have the experience to steer you in the right direction.
Plan for the Takeovers Code
One key aspect to consider is how you’ll deal with the Takeovers Code. This can catch smaller crowdfunded companies out, and can potentially lead to huge costs and restrictions that are both unnecessary and unavoidable. For example, small changes in ownership – that would normally be essentially free – can cost $10,000 to $20,000, or more. It’s worth understanding how you’ll structure the offer to either avoid or minimise the effects of the Code. Otherwise, you’ll need to be prepared to comply with the Code.
Also take care with rewards. While it’s tempting to offer your shareholders “treats”, this can cause problems – both practically and under tax or company law. We know of companies that have faced significant issues post-raise due to offering rewards that weren’t ideal for the business (hint: discounts generally work better than gifts). Luckily, you can generally keep everyone happy with a little forward planning, and some specialist advice.
Finally, remember it’s generally much easier to sort your structure before your new shareholders come on board. Consider “opting-out” of the financial reporting provisions under the Companies Act to remove the default requirement to be audited, as this can catch some smaller companies out. A small company will often be better off forgoing an audit for a year or two, and using that money (again in the thousands of dollars) to grow the company for the benefit of all shareholders.
In this vein, small companies will often have a few quirks in their business. If fixing these blemishes requires all shareholders to consent, then this is much easier to do before your new shareholders come on board.
You’re ready to go
Once you can answer these three questions confidently, you’re ready to invest your time in planning the raise. You’ll still need to hustle and work hard during (and after) the raise, but you’ll have a good base to start from. We’ve worked with clients raising funds through equity crowdfunding (and otherwise), and we’d love to see more businesses going for gold – especially from Otago.