Equity Crowdfunding for Startups

Elliot Begoun, principal of The Intertwine Group, focuses on branding strategies for food and beverage companies.  He recently wrote a post titled ‘5 ways a crowdfunding campaign can help your startup.’ You can read it here.

As a lawyer focusing on equity crowdfunding and Title III of the JOBS Act (Reg CF), much of what Mr. Begoun wrote sounded familiar. In the 100 or so times I’ve presented equity crowdfunding to potential clients I’ve stressed the ancillary benefits not gained from traditional funding like bank loans or venture capital.

I list Mr. Begoun’s five benefits with my own comments.

  • Cash: This of course is not ancillary; it is the main purpose behind any kind of crowdfunding. Equity crowdfunders can raise up to $1.07 million dollars in a twelve-month period. Most don’t hit this but the overall rate is growing as awareness builds. Reg CF recently turned two and the future looks bright especially with some rule changes (here’s looking at you Congress).
  • Product/Market fit: Presenting your new company to world can be scary but it’s also as Mr. Begoun states an “open source focus group.” Is your product ready for prime time? Will you be able to outgun your competitors? Reg CF forces a business to confront these questions in legal documents and while pitching to potential investors through FINRA-regulated portals. Receiving crowd-sourced feedback can be invaluable to fine tuning your plan and messaging.
  • Crowdmarketing: This is one of the most overlooked and important aspects of crowdfunding. If done correctly your equity crowdfunding campaign will organically market you, not only your raise but also your product/business. When you align your investors’ economic interest with your own you receive the benefit of their endorsement on their social media properties, which snowballs into a network effect.
  • Evangelists: I usually say ‘ambassadors’ but whatever you call them they are your online promoters. If you accumulate enough people who believe in you and what you’re doing you get an “army of your champions.” Where do you find them? Start with your client/customer list, previous investors, and others who believe in you.
  • Vetting: As Begoun writes “Running a successful campaign says a lot about you as a founder and your product.” This includes your ability prioritize, manage, multitask, delegate, select successful vendors, build brand awareness. Who is looking at you and evaluating this? Not only your Reg CF investors, but larger institutional investors, competitors, and potential partners. If you eventually decide to go the investment bank/venture capital route, a successful equity crowdfund raise seats you more comfortably at the table with stronger negotiating power.

Equity crowdfunding is not a panacea. Fundraising is still hard and throwing a page on the internet guarantees you nothing. But Reg CF puts more tools in your capitalization toolbox with lots extra benefits unavailable even a few years ago.

Thinking about it? Want to learn more? Email me at info@thecrowdfundinglawyers.com

By Jossey PLLC

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