Want to invest in startups? Here's a list of the best equity crowdfunding platforms.
It’s no secret that the biggest barrier to starting a business is a lack of access to capital. In the case of brick-and-mortar businesses, the simple act of finding a place to open requires a ton of money. The same holds true for businesses that are seeking to expand their operations. For the longest time, business owners looking to raise funds were limited to a few choices. Borrow money from a bank, try to raise capital from people within their immediate network (e.g. friends and family) or try to get venture capital. Thanks to the rise of equity crowdfunding platforms, this is no longer the case.
Why Should Businesses Consider Crowdfunding?
The concept of equity crowdfunding is similar to selling stock to investors in your company. You raise capital by selling shares of equity in your business or company. When the business makes money, investors get paid a dividend based on the amount of their equity share. However, crowdfunding differs from selling stock in several very important ways.
First and foremost, to sell stock, you must be willing to take your business public. As a publicly-traded company, you will be subject to the regulations of the Securities and Exchange Commission (SEC). If your business doesn’t meet the SEC’s eligibility requirements, you won’t be able to take it public at all, which of course means no money. Crowdfunding on the other hand, allows you to raise capital from a wide investor pool without having to go public.
Crowdfunding also offers several other potential advantages over traditional stock offerings. The simple act of posting your company on a crowdfunding platform can result in a significant amount of additional exposure for your business. Even in cases where potential investors decide not to invest in your company, they still may be enamored enough with it to check out your website and buy one of your products. Crowdfunding platforms also have their own social media platforms where they advertise new opportunities.
This gives both investors and noninvestors a chance to start following you on social media. Once this happens, you’ll be exposed to other like-minded people in their networks, any of whom could theoretically invest in your crowdfunding opportunity. The ability to go viral and spread organically is one of the most unique aspects of crowdfunding. Typically, stocks are bought or sold in a closed investor loop, and the general public only finds out about it after the share prices are too high for them.
What can Equity Crowdfunding pay for?
Before you jump head-first into trying to seek crowdfunding for your business, it’s important to understand what it does and doesn’t pay for. Equity crowdfunding is designed to help businesses get off the ground, expand or raise money for capital expenses. So, imagine for a moment you found the best olive oil in the world on a small family farm in Italy that no one ever heard of and you wanted to import it to the United States. If you didn’t have the money to start that business yourself, you could use equity crowdfunding to build out the infrastructure you need to start importing it into the United States.
Common Business Expenses:
- Trademark applications
- Legal fees
- Import/export licenses
- Storage facilities stateside
- Opening a storefront
- Designing your webpage
- Business travel
Even if you’re not starting an olive oil import company, you can get the idea here that equity crowdfunding is strictly for these types of expenses. With that said, equity crowdfunding is not a blank check. There are limits. You can’t use equity crowdfunding to pay off debt. The reason for this is that paying off debt doesn’t really offer investors any opportunity for dividends. Nor does it expand your business. It simply helps you pay debt down.
What’s more, if your business is so deep in debt that you need crowdfunding to pay it off, it’s highly unlikely you’re going to start paying dividends anytime soon. In this scenario, the money crowdfunders put in would be less an equity investment than an extension of credit by another name. That’s a lose-lose situation for the investor and the crowdfunding platform.
To put it simply, you can use equity crowdfunding to buy your olives and pay the shipping costs for your olive oil. You can even use it to open a store to sell your olive oil. But you can’t use equity crowdfunding to pay off your olive oil company’s credit card bills.
How do Crowdfunding Startups and Businesses pay Dividends?
This is an incredibly important question. When crowdfunding first hit the scene, it was not equity-based, meaning investors did not gain ownership shares in the companies they invested in. Instead they received a prearranged bonus or reward if the company succeeds. Under this scenario, would-be investors in our olive oil company would receive a lifetime supply of super high-quality olive oil made from hand-selected olives as a payout if the company is successful.
In equity crowdfunding, investors would be buying a piece of your company and therefore be paid dividends on your net profits. So, an investor who bought a 20% stake in your company would get a $200,000 dividend if your olive oil company generated $1 million in net profits.
With that in mind, it’s a good idea to hire an attorney to hammer out the terms of the equity arrangement you make with your investor(s). Equity investing has a great many legal complexities, and if you don’t have them hammered out in advance, things could get very sticky down the road. Lawyers are expensive, but the best interests of both you and your investor(s) will be better served by having a proper agreement in place.
The Best Equity Crowdfunding Platforms for Startups
If you’re thinking about using equity crowdfunding for your startup, you might want to check out this list of Benzinga’s best equity crowdfunding platforms for startups.
- Available to both accredited and nonaccredited investors
- Open to all U.S.-based businesses
- $195 startup fee
- Must hit full funding goal to receive funds
- Takes 7% of the total crowdfund
- Technology focused on internet, gaming, mobile apps and social media
- Highly selective — accepts less than 5% of applications for crowdfunding
- $99 application fee
- $250 due diligence fee
- Takes 5% of total amount raised through crowdfunding
- Open to all types of business startups
- Minimum investments of $100 to $1,000
- Available to both accredited and nonaccredited investors
- Caters toward long-term investments
- Not the best for those seeking quick returns
- Very exclusive, accepts less than 1% of applications
- Only wants companies with very high upside
- Rigorous due diligence for applications
- Businesses can raise up to $30 million
- 7.5% total fee
Benzinga’s Best Crowdfunding Investments
If you’re looking for funding for your business but you don’t think crowdfunding is the right setup for you, you’re in luck. Benzinga has tremendous resources for small businesses, including a list of the best crowdfunding investments, which you can find below.
Equity crowdfunding has created a brave new world for both investors and business startups. In years past, the only way for investors to gain an equity share of a new opportunity was to be fortunate enough to know the business owner or a venture capitalist (or someone close to one of them). This meant that the biggest beneficiaries of funding startups were either banks or venture capitalists.
It also meant business owners had very limited options when it came to securing capital. Because the truth is, getting access to startup capital funding was as hard for entrepreneurs as it was for investors to discover ground-floor business opportunities. Equity crowdfunding seeks to change all of that. If it sounds like the kind of thing you might be interested in, Benzinga is a great place to take a look at your options.
Which businesses are suitable for crowdfunding?
Technically, all businesses are suitable for equity crowdfunding opportunities. However, different equity crowdfunds focus on different types of businesses. Some deal with smaller equity amounts geared toward quicker and lower returns. Others are focused on long-term, high-yield investments that offer huge payoffs. So, the type of business opportunity your startup offers will go a long way toward determining the best crowdfunding platform for you. The same goes for investors. Each platform offers various minimum investments and qualification procedures. You’ll need to research them to see what’s best for you.
Do you pay back crowdfunding?
No. Equity crowdfunding is not a loan. If your startup receives equity crowdfunding, each person who invests in your business will receive an equity share in your business. The investors are not lending you money, they are buying a piece of your business. Their equity share will entitle them to a proportional percentage of your net profits. So, for example, if an investor buys a 35% equity share in your company through crowdfunding, they will receive 35% of your net profits. Under a loan, you would simply pay back the bank.
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