Equity crowdfunding is not complicated, but there are fair number of myths floating around. Some of this is due to misinformation and the rest has to do with evolving financial instruments, and changing policy surrounding equity crowdfunding. These seven myths will dispel everything entrepreneurs have been told — from messed up cap tables to venture capitalist grievances.
1) MYTH: “Only for early stage companies”
Not true!
Equity crowdfunding works for all different stages and types of companies, including those who have already raised angel or venture funding. Many companies use equity crowdfunding to gain awareness and/or to build a long-term fan base.
There are two core benefits to equity crowdfunding:
First, you can raise money. Companies of all stages do this.
Second, you can gain investors who are also your most loyal customers and brand ambassadors. Equity crowdfunding helps you share the value of your startup with members in your ecosystem. In that case, an equity crowdfunding raise could even be part of a larger round.
More later stage startups are realizing this:
A recent example, Geostellar, a company with $3.5M in yearly revenue, ran an equity crowdfunding campaign on Republic as a way to acquire new customers and develop long-term relationships with clients.
In another example, Napa Valley Distillery raised $700K+ with an equity crowdfunding raise on First Democracy VC. They could have sought out institutional funding, but an equity crowdfunding raise made sense as a way to gain exposure and attract new customers for their distilled spirits company, which sells direct to consumers.
Pearachute, who raised $250K on Republic this spring and also raised from TechStars Ventures, Chicago Ventures and others, used equity crowdfunding as a way to share in their success with customers and small business partners.
2) MYTH: “The regulations are too complex and limiting”
Not really.
If you do it on your own, it might get overwhelming, but that’s where platform’s expertise comes in: leading platforms have figured out the most efficient and founder-friendly way of complying with all the regulations and lay out the step-by-step roadmap for you when you prepare the campaign.
What are some of the “worst” regulations?
Disclosure regulations.
The most complex part is filing a disclosure document with the SEC: the Form C that is accompanied by a snapshot of your company’s finances.
The good news is that the Form C can be filled out by a bot system like iDisclose in a few hours. You don’t even need to have an in-house CPA or attorney.
Some have expressed fears over the dreaded financial audit, but this is unfounded: it is only required if this is not your first time raising via equity crowdfunding.
You don’t have to provide an annual tax report to your crowd investors. Your sole requirement post campaign is filing a simple Form C-AR and posting it on your website 120 days after the end of your next fiscal year.
Advertising regulations
The rules only say that you can’t advertise your campaign before it launches. After you launch the campaign, you can advertise as much as you want, with the only limit of not including more than 1–2 deal terms in each of your ads.
3) MYTH: “Venture capitalists look down on equity crowdfunding”
Not true.
A successful equity crowdfunding raise proves that your customers stand behind you. Venture capitalists see this as a competitive advantage and as a signal that you’re onto something — and many are happy to invest alongside of an equity crowdfunding raise.
Top VCs see crowdfunding favorably and recognize the potential: Fred Wilson predicted that crowdfunding platforms will bring in 10 times that of what VCs bring in annually.
Here’s what other venture capitalists have to say about equity crowdfunding:
“From an investor perspective network effects are one of the few, possibly the only, source of sustainable competitive advantage in a world where almost everything else can be copied quickly.”
— Albert Wenger, Union Square Ventures
“Angels and VCs bring expertise, but the crowd brings customers and fans.”— Naval Ravikant, AngelList
“…to raise capital an entrepreneur has to know VCs or someone who knows VCs. Distribution is closed off and secretive. Equity crowdfunding is quite the opposite: it is global, open, instantaneous, and non-discriminating for both sides of the marketplace.” — Jason Heltzer, Origin Ventures
In an article titled, “Venture Must Embrace Crowdfunding, it’s Where the Future Lies”, Simon Cook, Executive Director of Draper Esprit (founded by Tim Draper), wrote:
“This is why VC firms like ours are changing in several critical ways. The first change we’re making is to regularly invest alongside the crowd — we’ve been doing so on platform Seedrs (UK-based), on the same terms as their investors. This enables those of you investing using platforms to invest in a company which is also being buoyed by the networks, management advice and guidance of a seasoned VC. This is surely a win-win for everyone.”
Speaking of the Drapers — there’s a new show coming to Sony Television, airing this November, which features companies that are raising through equity crowdfunding on Republic, pitching their respective companies to Tim, Jessie, and Bill Draper, along with guest judges.
4) MYTH: “The cap table will be ruined for your next round”
Not anymore!
Many venture capitalists were originally concerned about how equity crowdfunding might mess up the cap table with too many investors, but there has since been a new instrument formed, called the Crowd Safe, which fixes this problem.
A Crowd Safe does not expire or accrue interests. It only converts into cash or equity upon an IPO or the company’s acquisition, preventing alterations to your cap table for the considerable future.
It is up to you to decide on the terms of the offering like the valuation cap and discount rate.
With a Crowd Safe, there is no expiration or maturity date — so you don’t have to deal with revising interest rates or the like.
5) MYTH: “Raising equity crowdfunding is too expensive”
The benefits outweigh the costs.
As with any kind of raise, there are costs — and they can add up.
Here are the costs that are required to comply with equity crowdfunding regulations:
- $1,500 for iDisclose to file your Form C with the SEC
- $1,500 for an escrow account, a requirement to host a campaign
Other costs:
- Accounting
- Video production (optional)
- Marketing
- Portal fee
Accounting costs depend on how complex and well-kept your financials are. If you have a licensed CPA on the team, your additional accounting costs could be zero.
It isn’t. There are costs to doing a campaign, but to raise up to $1,070,000, you need a few thousand dollars. It would cost you as much time and money to hold and attend numerous investor meetings.
The following costs are required to comply with equity crowdfunding regulations
- ~$1,500 to file a Form C with the SEC
- ~$1,500 to have an escrow account which is required to host a campaign.
You might incur a range of costs in addition. Accounting costs depend on how complex and well-kept your financials are. If you have a licensed CPA on the team, your costs can be $0.
You can spend as much as you choose to spend on the video production and marketing, starting from $0. To raise a larger round, startups typically spend more on marketing, but it’s money well spent: you’re acquiring investors and loyal customers!
A typical funding portal will charge you between 7% and 15% of your equity crowdfunding raise as fees.
Republic charges 5% of the cash proceeds, and a Crowd Safe equal to 2% of the total amount raised (not 2% of your company). Investors do not incur any fees.
Other platforms such as Wefunder, SeedInvest and First Democracy VC typically charge between 7% and 12%, with in some cases additional fees that are incurred by founders and investors.
When you take into consideration the time you and travel expense you’ll likely incur with a traditional venture raise, equity crowdfunding seems a lot less expensive. With a typical seed stage, you’ll be in motion for 40–60+ meetings.
Also, David S. Rose, reports in Forbes, “The odds are 40:1 against getting money from angels and 400:1 against a company receiving an investment from a VC fund. This means that it is a “buyer’s market,” and it is infinitely more common for an investor to decline to make an investment offer than it is for a company to decline to accept an investment offer.”
Just think about all of the time you might save by reaching out to your wider network for a raise rather than setting up one-on-one meetings with one investor or firm at a time. Your customers already know you, so if you have an existing and actively engaged community, who better to invest?
6) MYTH: “I can’t fundraise from VCs or angels during an equity crowdfunding campaign”
Yes, you can.
On the legal side, equity crowdfunding is different from other types of securities offerings: it won’t combine or interfere or prevent your from pursuing other fundraising methods.
It’s a stretch for one person to do a VC raise at the same time as the campaign, but they are not mutually exclusive for any reason.
In fact, high-profile investors will see a successful crowdfunding campaign as a strong positive signal, which will make closing your VC/Angel round easier.
7) MYTH: “Running a campaign takes too much time and effort away from my business”
It does take time, but not away from your business.
Compared to the time spent raising venture capital, your effort goes to growing and strengthening your business at the same time as fundraising. Double value.
Read the full comparison: equity crowdfunding or VC? Pros and cons compared.
Spending time on equity crowdfunding is spending time developing the relationship you have with existing customers — as well as developing new ones.
Your business depends on your ability to sustain the resources that are required for growth, so spending time running a campaign is actually time well spent. Plus, interacting with your customers in a deeper way, while fundraising is a great way to build long-term engagement.
Equity crowdfunding as a way to:
- Fundraise: Bring capital in for growth
- Share ownership : Invite your customers to invest (own part of your company and be part of the upside)
- Engage: When your customers invest, they’ll be invested in your long-term success
If you compare the time that would be required to raise a venture round, equity crowdfunding can actually be easier because you’re convincing people who already love what you do or what you’re offering to write small checks. As the campaign is both a fundraising and marketing effort, you can use the time campaigning for investments as time to expand your network and fan base!