Fundraising Instruments: Which one is right?
It is important to understand the differences between the various Business Crowdfunding instruments we make available to you, and decide which is best for your company based on your business goals and needs.
The 2 top level categories are Contribution and Securities-based crowdfunding.
Contribution is non-investment funding. This model fits companies who have products or services that supporters and contributors are willing to pre-purchase, contribute to, or support for personal reasons.
Securities-based funding gives ownership, or a promise of future revenue to investors in equity or debt.
If you’re considering Securities-based funding, one of the first top level considerations to ask yourself is, which model fits your business best? Are you in a high risk innovation-oriented company, that has potential for exponential growth if successful? Or, is your business a more traditional service, like a brick and mortar business, that will have a consistent revenue model, but less potential for explosive growth and scaling?
Generally, businesses with exponential growth potential should look to raise Equity-based funding. For example, some technology and innovation companies that could sell in the future for a several times multiple of yearly revenues, can fit the profile of a company that should consider this funding model.
Companies that have a simpler and more predictable revenue stream are more likely to fit the Debt-based funding model. These companies produce consistent, sustained and predictable revenue growth, but typically don’t experience liquidity events like selling the company or going public.
Here are some quick tips to help you think through the best funding model for your business:
- Non-equity funding raised online
- Contributors receive a non-monetary reward for helping fund and grow your business
- Companies offer rewards or “offerings” in return for contributions
- Best-suited for startups and young businesses who need early stage funding, but can be used for any stage of the business life cycle for small funding rounds
- Available now
- Companies offer equity shares in return for capital investment
- Supporters become shareholders
- Best-suited for established small and medium busineses who can show progress against major milestones, are in a growth phase, and can demonstrate exponential market potential backed by data
- Expected to be available to accredited investors in early 2013 through Crowdfunder’s partnership with Gate Global Impact
- Not yet available
- Similar to a loan where supporters are repaid with interest on a set schedule
- Supporters do not receive ownership shares in the business
- Best-suited for established businesses with stable revenue and assets
- Not yet available
- Crowdfunding financing is taxable income, CRA says (business.financialpost.com)
- Why the Crowd is for lemmings (flamingosky.com)
- If You Can’t Beat ‘Em, Join ‘Em – U.K.’s Angels Den Jumps On Crowdfunding Bandwagon (newspodge.wordpress.com)
- Why Equity Crowdfunding is NOT a Terrible Idea (criccafunding.com)
- Crowdfunding can trigger tax consequences (business.financialpost.com)
- Crowdfunding: Closing the Funding Gap for Women and Minority Businesses (kimberlynevans.com)