Successfully using equity crowdfunding platforms is challenging and takes a good bit of homework. Finding the product or service that has the most potential is only the start; you also need to assess the percentage of equity that makes sense to both sides as far as what you are willing to invest. However, using equity crowdfunding platforms can be exciting and have high rewards if you choose right and get a favorable percentage. While this post focuses on the investor side, we’ve also covered equity crowdfunding from the entrepreneur side.
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 consider using equity crowdfunding platforms.
Our services related to equity crowdfunding platforms are more on the entrepreneur side, where we help match startups with the perfect platform for their raise.
Equity Crowdfunding Platforms Process
The first step in using equity crowdfunding platforms is choosing the type of product, service, or business to invest in. If unsure, you might select a considerable equity crowdfunding platform and browse. You might also read about a company seeking 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 do you narrow down all your potential choices if you want to invest through equity crowdfunding platforms? Here is a start:
Scalability and Growth
The first thing you need to wonder about the product or service in question is whether it is scalable. In other words, will a lot of people want it? There may be many creative and exciting new products or services 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.
Company Management
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.
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 questions, whether they are designed to pull out more information or to 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.
The Equity Crowdfunding Deal
Finally, you need to look at the deal itself. Agreeing with exactly how much of your investment through equity crowdfunding platforms 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 Platforms Rules
There are certain restrictions for equity-based crowdfunding that you should be aware of. The primary condition for equity-based crowdfunding, at least at the time of this writing, is that you have to have a certain income or net worth to invest in some types of raises – called being an “accredited investor.” This regulation is because the government wants to ensure the market is stable, and people should not invest through equity crowdfunding platforms beyond their means. Others would argue that this is unnecessary interference, given that the government does not regulate other investment forms this way.
The equity crowdfunding rules might change, so we will keep you posted!
Equity Crowdfunding Platforms Summary
Equity crowdfunding is not for everyone, as it presents a risk for the investor, company, or person seeking the investment. You may end up giving up a significant portion of your company, in essence, paying back too much money for the amount of the initial loan. Then again, your remaining equity will also be highly valued, so you may not be so upset. As an investor, equity crowdfunding is high risk and high reward. While, on the one hand, you may get no payback, you might also get quite a bit more than you otherwise would have if you chose correctly. Some investors may choose to diversify their portfolio and have only some of the money tied up in equity crowdfunding investments.
The Key to Equity Crowdfunding Platforms
The key to using equity-based crowdfunding platforms is doing your homework. As an investor, you must carefully choose the most promising investment while sometimes not reaching too high and taking too much risk. As a person with a good business plan or product, you need to find that perfect balance between offering enough equity-based crowdfunding to make things interesting for the investor and not offering so much that you end up not owning enough valuable products or services.
Investing through equity crowdfunding platforms can pay off when both sides do their homework!
If you are an entrepreneur considering using equity crowdfunding platforms, we can help connect you to the best match for free. Contact us any time.
