Equity crowdfunding: everything you need to know

Equity crowdfunding lets you raise money for your startup without taking on debt. Unlike venture capital, you don’t need to give away large stakes in your company to one investor. Instead, you offer a small portion of your business to many investors. Here’s what you need to know.

Key takeaways

• Raise money from multiple investors through online platforms in return for equity in your business

• You need a strong business plan and pitch to catch potential investors’ eyes

• You may not retain sole control of all decision-making when you give up equity in your business

What is equity crowdfunding?

Equity crowdfunding is a way to raise money for your small business from lots of different investors. It is an alternative funding method for financing your startup.

This method involves offering a share in your business in exchange for a cash investment, instead of taking on debt through a business loan, which is known as debt financing.

Crowdfunding benefits investors by reducing the amount a single investor could lose. Since everyday investors can contribute smaller amounts, these platforms attract a wider audience. More investors on a platform increases your business’s chances of securing the funding it needs.

How does equity crowdfunding work

Every crowdfunding platform is different, but the general process is usually similar. Let’s break it down:

Step 1: Find a platform 

There are several crowdfunding association platforms to pick from. Some are specifically for crowdfunding, while others also offer venture capital options. Choices range from large, well-known platforms like Seedrs to small niche platforms. You can’t just plump for any option, though. Selecting the right platform is important if you want to reach the right type of investor. 

Step 2: Prepare your pitch

Your pitch is your business’s voice on the crowdfunding platform. Include as much detail as possible about your idea, along with financial projections, customer testimonials, how much money you need and what you need it for. Depending on the platform, you may be able to upload a video presentation, which can make for a more accessible pitch. 

Step 3: Set your terms

Let investors know how much equity in your business they can expect to receive if they invest. Your business valuation helps with this, so make sure you’ve worked out your numbers. You also need to outline how an investor can exit the investment and what happens if you sell the business or decide to go public during this step.

Step 4: Launch your campaign

Once everything’s in place and the online platform has given you the green light, you can launch your campaign. It usually lasts for a specific period, during which potential investors can view your campaign and decide if they want to invest. 

Step 5: Investment stage

During this step, potential investors may reach out with questions, or they may invest based on the information you’ve provided in your pitch. Crowdfunding investors often pledge small sums – you’re unlikely to get huge amounts from only one or two investors. 

Step 6: Goal stage

Many equity crowdfunding platforms require you to meet a specific funding goal before releasing the money. This protects investors, as they get their money back if the goal isn’t met. It’s important to set a realistic goal that makes a difference for your business.

If your campaign is successful and you receive the funds, you must keep investors updated on your progress and financial performance. And depending on the terms you set, investors may also have a say in business decisions going forward.

Is equity crowdfunding right for your business?

Equity crowdfunding isn’t right for every startup. You may prefer to work at your own pace without the pressure of regularly updating investors. If you’re content with maintaining sole control and don’t plan to scale your idea into a large business, you might want to give equity crowdfunding a miss. However, for others, equity crowdfunding can be a valuable opportunity to elevate their business. Here are some examples:

• High growth potential. If your business has the potential to scale at pace, then you may be an attractive investment opportunity for investors 

• Exciting industries. If you operate in certain sectors, such as green or sustainable tech, food and beverages, or other types of technology, you might attract more investors  

• Established operations. Businesses that have been trading and are looking to grow can do well. If this sounds like you, be sure to provide up-to-date financial information so investors can see your progress

• Creative. If you can inspire investors to also become fans or supporters of your idea, you might be on to a winner. Businesses in film, TV, art or music often have a better chance of building a community of supporters 

Equity crowdfunding advantages and disadvantages 

Equity crowdfunding can be a great way to raise funds for your business, but it can also dilute ownership. Let’s look at the pros and cons.

Pros

• Access to finance. Equity crowdfunding allows you to raise funds from lots of investors, which can be especially helpful in the early days when accessing secure traditional financing is tricky.

• Shows your idea is credible. You can view launching your crowdfunding campaign as a form of market testing. If you generate investor interest, this may validate your idea and boost its potential.

• Increased engagement. Investors often become advocates for any business they invest in, providing not just capital but also a network of support. This may lead to valuable new connections from a diverse group of stakeholders.

• Flexible. You may find you have more control over the terms of the funding compared to more traditional options. You can set your valuation, how much equity you give away, and the amount you want to raise.

Cons

• Loss of ownership. By offering equity, you give up a portion of ownership in your business. This can dilute control and your ability to make decisions.

• Regulatory Compliance. Equity crowdfunding is subject to regulatory scrutiny involving complex legal requirements, both of which may increase associated administrative tasks.

• Investor Relations. Keeping many investors up to date and remaining accountable is time-consuming and can lead to increased pressure, especially if you’re on your own or working with a small team.

• Risk of falling short of your goal. If your campaign doesn’t meet its funding goal, you may not receive any funds, meaning you have wasted time and effort, and have a funding shortfall.

Alternatives to equity crowdfunding 

If equity crowdfunding isn’t right for you, there are plenty of other options. If you like the idea of equity finance, you could consider venture capital or angel investment.

Another option is debt financing, such as a business loan, a startup loan, asset finance, invoice finance, business credit cards or the government-backed Start Up Loan scheme.

You could also consider bootstrapping your business and financing it yourself or through friends and family. You might be able to get funding with the help of a grant too. 

Equity crowdfunding platforms

There are many different platforms available, each offering different things. Here are the five most popular platforms and what they offer:

Seedrs

Acquired by US firm Republic in 2021, Seedrs allows investors to buy shares in startups and growing businesses. It emphasises transparency and aims to provide a straightforward investment process.

Crowdcube

A leading UK platform, Crowdcube connects startups and small businesses with potential investors. It supports a range of industries and allows investors access to detailed pitches and updates.

Fundable

Businesses using Fundable can choose to raise money through both rewards-based and equity crowdfunding.

Crowdfunder

Focuses on social impact and innovation, catering to various sectors.

Wefunder

Encourages direct interaction between investors and founders, fostering a community-driven investment approach.