Equity crowdfunding investments are challenging and take a good bit of homework. Finding the product or service that has the most potential is only the start; you also need to understand the percentage of equity that makes sense to both sides. But equity-based crowdfunding investments can also be exciting and have high rewards if you choose right and get a favorable percentage. The bottom line is that you and the person you invested in are both hoping for the product or service to take off, and even if one side or the other is a little disappointed – you for not getting a higher percentage of them for giving up too much, you both will be quite happy anyway if things go well. This page should give you a starting point if you are thinking of equity crowdfunding.
Equity Crowdfunding Steps
Of course, the first step in Crowdfunding equity investments is choosing a product, service, or business to invest in. You can look at any number of well-known crowdfunding websites or look for pitches that are made independently by business owners on their sites. You might also read about a company looking for funding in a trade or business publication. Or, if you have made this type of investment before, you might hear directly from the business. But how to narrow down all your potential choices if you want to invest in startups for equity? Here is a start:
Is it scalable?
The first thing you need to wonder about the product or service in question is whether it is scalable and flexible. In other words, will a lot of people want it? There may be many creative and exciting new products or services on the market each year, but you want one that can sell across the country or the world. Your goal needs to be that the product you choose can grow into a large market or at least a market that will fulfill the company’s goals to make equity crowdfunding worthwhile.
Who is Behind It?
Now look at the management of the company. What are their qualifications on paper and their intangibles off of it? Do you trust this management group to carry forward the business plan they have presented? Are the right people in the right jobs for this company? Where are their weaknesses, and can they be overcome? The people behind any company are so important because even the best idea must have a solid management group behind it.
What is the Business Plan?
The business plan is critical to investigating a product or service before deciding whether to invest in startups for equity. How realistic is their goal, and have they sufficiently explored threats and challenges that might arise? Sometimes, you can ask whether they are designed to pull out more information or elaborate on what is there. You need to agree with the overall business plan, and you also need to assess the people behind the company on the thoroughness and thoughtfulness of the document.
What is the Actual Equity Crowdfunding Deal?
Finally, you need to look at the deal itself. Agreeing with exactly how much of your equity crowdfunding investment is worth and what piece of the company can be challenging. You have to understand that the person or company will be very enthusiastic about their product or service’s potential, which may mean that they inflate its future value. You need to make sure you are getting the possibility of a generous return for your money.
Equity Crowdfunding: Value
The equity crowdfunding investor needs to value the product or service in the marketplace to know what owning x percentage will mean. If 1000 units can be sold yearly, but the product has slim profit margins, the equity stake may not be worth that much. On the other hand, if many units can be sold and the profit margins are large, then an equity stake can be quite worthwhile. Sometimes, the presentation by those looking for investment shows that the equity crowdfunding they will receive will lead to more sales or better profit margins. For example, if equity crowdfunding is used to open a state-of-the-art factory can mean that profit margins rise.
Equity Crowdfunding: Return
For a well-established company judging the potential return is a little easier because the value of each percent of the company can be determined. But for a new product or service, both sides must estimate the value to decide what amount of money should be invested for a given percentage. The investors tend to go in very conservatively, while those behind the product or service have high hopes. This part can be challenging – yet, in some ways, fun.
Equity-Based Crowdfunding Summary and Our Work
Once you have a good idea of how the process works in real-time, you must choose a site or two where you will post your project or look for an investment. As we’ve said, we do not endorse any particular equity crowdfunding site here because the fit between your unique reasons for investing and hopes for a return may lead you to your specific list. We can help with that! Contact us to learn more about investing in equity crowdfunding.
