As you traverse and explore the various fundraising stages, options, expectations, vehicles and overall process, crowdfunding is one of the options.       

Crowdfunding is a collection of small amounts of capital from a large number of individuals to finance a start-up or emerging business. Crowdfunding generally uses the internet for easy accessibility by many investors, usually accredited, according to SEC requirements. Crowdfunding can be an excellent source of capital for founders that have ‘tapped out’ the capital available from themselves, relatives, friends and other personal sources. Most investors on crowdfunding websites tend to be speculative in nature, and they are more likely to invest based upon a familiarity or preference for the sector or product and not on a rigid financial basis, specified return or exit. This means crowdfunding can offer some very favorable terms and valuations to the founder, whether using a convertible note or equity.

Crowdfunding also provides ‘easy’ access to a large pool of investors and can be very helpful in your growth process and fundraising plan. A company may attempt to raise a small amount, perhaps $25,000, just to meet immediate needs. Depending on the SEC regulations for the type of raise being conducted, companies can raise up to $5,000,000 in crowdfunding capital. Most early-stage companies will seek raises in the $100,000 to $500,000 range. Crowdfunding can often be viewed as a marketing tool for the brand to help build awareness among “the trade”. However, there are considerations that every founder needs to take into account as they decide whether to engage in crowdfunding.

Let’s take a look at monetary costs first.

Participation Fees: The basic fee is usually 6% to 8% of the amount raised, but it can be higher. There may be a flat fee (often several thousand dollars) to join, or that is collected based on a specific minimum raise (such as $10,000 from the first $100,000 raised) with the percentage then applied to the remainder raised. Some websites may even charge all of these types of fees: a fee to join, a minimum success fee, and a percentage of the remainder.

Other Fees and Requirements: To begin, some websites may have certain financial or other requirements to raise on their website (size, profitability, sector, etc.). Many websites require a full financial audit of your reporting. They may ask you to provide one, or offer the service themselves. A full financial audit could cost several thousand dollars.  They may also require a legal review of your SEC filings, your equity subscription agreement or C-note terms, your operating agreement, your articles of organization, etc. This could be an additional cost of several thousand dollars.

Crowdfunding means you will have many small dollar investors who will require an annual K-1 (a tax document required by the IRS) to report earnings or losses, if you are offering equity. The website may charge a fee for this service, or it will be something that needs to be turned over to your accountant. If you are raising on a C-note, when the note converts to equity, you will acquire all those investors on a cap table. This adds a great deal of effort to your accounting, reporting and communication tasks. On more sophisticated websites, the platform becomes the note or equity holder, and charges for keeping individual investors properly informed. However, they may have strict guidelines as to when a C-note converts or an equity placement can be purchased, and an unwillingness to change terms.

Some crowdfunding websites may require a minimum amount raised to close the campaign and for you to get any payout. They may also limit the time you are listed on their website, as they do not want long-term, open raises. Finally, for the fees they charge, some websites will market your raise to investors on their websi

Other considerations:

Crowdfunding is ‘easy’ access, but not ‘easy’ money. While you are getting access to many investors, some of those investors may not be in your industry/sector. Be sure to investigate if companies in your sector have been successful on the website. Also, potential investors may contact you with questions directly on the platform (via chat or thread feature) or email or phone. You may find yourself in time-consuming conversations or email exchanges with investors who are only going to invest $500 or $1,000. Also, crowdfunding is not ‘smart’ money. Few of your investors will be in a position to offer you any advice, contacts or knowledge to help you grow your business. You may also need to find ways to market your raise yourself to drive potential investors to the website, which can take a lot of effort for a small dollar return. 

Some crowdfunding sites will allow you to raise against a C-note or equity subscription outside of their website, but some will not. If you are able to raise outside of the crowdfunding site, you will likely be pursuing larger investors and dollar amounts, who may not like you offering more favorable terms to investors via the crowdfunding effort. So it is important to understand the appeal of your crowdfunding campaign terms (which the website will not change) to investors who are more savvy. Finally, if you are raising against the offering outside of the website, you need to consider how much the crowdfunding website will bring in, and if it is worth the extra cost and time.

Crowdfunding can be a nice option for a small company, but a founder needs to pursue it with caution and awareness. Work with your advisory team to see how and when crowdfunding makes sense for your business.  Approach your decision with your eyes wide open, including a thorough investigation of the      site’s offering, and evaluation of the full impact to you or your business. 

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Unlike crowdfunding, Brandjectory is home to savvy investors interested in the broader CPG industry who provide much more to your business than just capital – network, expertise, etc. Brandjectory does not take a transaction fee or commission on any capital you raise, but does provide our brand community with direct access to investors in small group meetings and one-on-one mentoring by investors. And, while you have to be fundraising to be on a crowdfunding website, Brandjectory is built to support the relationship building process with investors before, during, and between raises, making it a versatile tool throughout fundraising efforts.