Crowd Sourced Equity Funding Series
In chapter 2 of this series crowdfunding series we are discussing crowd sourced equity funding.
In the first article we identified there were two main models of crowd sourced equity funding, Investor led, and Entrepreneur led.In this week’s article we will look at the process the entrepreneur has to follow if they wish to pursue the investor led approach.
First of all, a quick recap, investor led crowd sourced equity funding. This is where the investor terms, company valuation and legal documents are set by way of negotiation. This negotiation takes place between the lead investor and the company raising the funding.
This is then followed by individual investors being given the opportunity to invest in the company on the same class shares, at that same price as you have agreed with the lead investor.
Crowd Sourced Equity Funding
There are 5 Key steps that you should follow if you want to secure crowd sourced equity funding.
BUT! before we head into these steps this is the perfect time for a quick pep talk! You think you are serious about getting an investor into your business right!
Well I want you to make sure you have your business plan and financials to hand.
Then I want you to hold a manager meeting. Sit down and together agree what amount of equity you are prepared to give away as a maximum to secure crowd sourced equity funding in your company.
Once this has been set record in the minutes of the managers meeting logs.
The 5 Steps Which You Should Follow!
Step 1 - Prepare
Prepare an overview of the company and submit to the chosen platform.
This must include:
The business, often Investors want to see that the business has moved from idea stage and has some early customers or a viable product. They want to see some evidence that what you have on offer will work. If your business is still at idea stage, its probably too early for equity crowdfunding and you should consider rewards-based crowdfunding.
The reason is the value of the idea stage business will be too low, unless there is a patent or an amazing team. You would also need to be prepared to sell a big share of the business. (Now is the time to check the amount logged in the minutes of the managers meeting).
Growth potential, if you are going to maximise your potential. You must be able to show growth markets that have potential to expand rapidly. Show that your model has the potential to scale quickly. Ideally without too much capital intake and large workforce demands.
Team, there is one true saying people invest in people. That’s why investors will be looking for talent and passion. They also need to feel they can work with you to help you execute your ideas.
Investment, how much money are you looking to raise, depending on the chosen platform one thing to note is that they will all have different lending bands.
Submit your expression of interest, this will then be checked by the platform to ensure it meets with their investment criteria.
Step 2 - The Initial Meeting
The equity crowdfunding platform will contact you to schedule a meeting, this can be done face to face or via telephone.
The main purpose of this meeting is for you to expand on the information you have already provided.
It is at this stage it will be identified if you already have a lead investor or not.
Step 3 - Find a Lead Investor
For any company seeking investment, having a lead investor is the magic key to successful funding. Regardless of what round, finding a lead investor can be invaluable to a company. It is important to find the right lead for your business, someone who can conduct due diligence and add value once you have been successfully funded through crowd sourced equity funding.
You may want to start by drafting a list of qualities that you would like in a lead. This could include:
- Prior experience in your industry.
- Understanding of your business sector.
- Unsuccessful business investments and reasoning behind failures.
- Sense of responsibility to invested business by spending time and providing support and advice.
- Strong ties with other businesses that could aid the company development.
- Network of investors with strong understanding of industry
These are just some of the things you may want to add to your list
Platforms like Angels Den offer a private introduction service to investors as part of their service.
One tip, if you want to convince an investor to invest in your business a sizeable amount and take you under their wing! You must show them that you are worth it. I do not doubt for one second that you understand the importance of a business plan so make sure you invest in the development of a great business plan.
A properly formulated business plan will be a very powerful tool in your search for a lead investor.
Step 4 - Due Diligence
Once you have chosen your lead Investor they will conduct due diligence
As we have previously discussed it’s a fact that many entrepreneurs are optimistic and therefore they tend to overvalue their business.
However, given the views of professional investors, entrepreneurs are more likely to offer more equity and with stricter shareholder rights when negotiating deal terms with angels and VCs.
In other words through the Investor led process, entrepreneurs are more willing to give away more of their business for less capital.
Step 5 - Open Platform
Once the lead investor has been assigned and due diligence has been completed. Its now time to launch your opportunity out onto the platform for a wider network of investors to invest.
Once the online investment opportunity closes all new investors will be issued with the legal pack of documents and then share certificates will be issued.
Note – this service is included in the cost of some platforms but not all so please check the T&Cs.
Investors will then have access through a relationship portal on the investment platform. You will be able to provide updates on progress, ask for advice and provide future funding round updates.
One final thing you need to allow at least 60-90 days for the whole process from start to finish. This could be longer if you are not able to find a lead Investor quickly.
The fees will vary depending on the platform you chose, however expect a success fee of around 6-7% of the total funds raised, plus a payment processing fee approximately 0.5% and in some cases, you may have to pay a set completion fee between £1500 – £3k
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In next week article of this Crowdfunding series – Crowd sourced equity funding we will discuss things that can go wrong and why they go wrong.