Equity Investor Crowdfunding platforms over the last few years have been appearing on the UK funding scene. It’s fair to say its captured the imagination of the public and the media. It has given a landscape for every business owner to try its hand at obtaining equity investment.
There are two models which you need to be aware of Investor led and Company led.
In Chapter 1 of the crowdfunding series we identified there were three types of crowdfunding.Donation & reward, equity and debt. In chapter 2 of this series we will discuss equity investor investment through crowdfunding.
Lets first start by discussing the obvious question you will first want to answer. What is equity based crowdfunding or sometimes referred to as crowd – investing?.
The answer – Its when a company exchanges shares in return for investment. Investors exchange cash in return for the opportunity to see cash returns from a company’s success.
There are two models you need to be aware of
- Investor led
- Company led
Let’s start by discussing the investor led opportunity. This is where the equity investor terms including the company valuation and legal documents are set by way of negotiation. This negotiation takes place between the lead investor or business angel and the company raising the funding.
This is then followed by individual investors being given the opportunity to invest in your company on the same class shares, at that same price as you have agreed with the lead equity investor.
Just image I am the lead equity investor and I want to invest in your business. I will work with you to negotiate the price and the amount of shares I would want to make the deal happen.
Once this had been agreed I would notify online other investors and ask them to join me in the investment opportunity.
Equity Investor -Company owners can set their own terms
Moving on to the company led approach, now in this situation you as the company owner set your own terms of investment.
There will be no lead investor like in the first example where I would negotiate terms for myself and other investors.
You will set the terms and issue them to potential investors. They will then make their decion to invest or not based on your company terms.
So, let’s get down to the nitty gritty and uncover how this really works
The Investor led approach, if you choose this method, continuing using me as the lead investor all other investors would get the opportunity to invest under the same terms which I had negotiated. They would also benefit from knowing that they would be putting their money alongside the lead investor into your company.
As the lead investor I would be making a very subjective valuation as most early stage startup at this stage would have very little by way of revenue or assets.
I would need to feel comfortable with the terms and be confident that I could make money from the deal before any agreement could be made.
Do not underestimate the importance that the lead investor will place on getting the right valuation. Over the years I have seen lots of deals not progress as neither party could negotiate the right deal.
If you are just starting on the journey of seeking an equity crowdfunding. There are some additional benefits to this investor led approach you need to be aware of.
- Many lead investors have already founded and run successful companies of their own.
- Lead investors can add value to the company by providing advice
- In some cases they are able to open doors to new business opportunities within their network of contacts.
- Some lead Investors will take a seat on the board to help with your business strategy.
What happens if you cannot find a lead investor! What happens then?
So you have exhausted all your options, you have run out of people to contact on LinkedIn.
You are now struggling to find a lead investor. Alternatively you have not been able to negotiate a deal through the investor led route.
Is there and alternative? Well the answer is yes. Its called company led equity investor crowdfunding.
The company route will allow you to take full control in terms of:
- Investment terms
Over the years, I have seen many deals fall by the wayside. The main reason for this is that many entrepreneurs place too high value on their startups. Without the right valuation you are wasting your time, crowd investors will not be able to achieve their desired returns.
Crowdfunding is still a relatively novel funding concept. Globally its growing rapidly. However, it is also in constant evolution and it’s fair to say some crowdfunding platforms are restrictive. They do not allow investors to negotiate or make counter offers. This often results in many investors walking away from potential deals they would have otherwise liked to invest in.
The model you chose will ultimately be dependent on what you are trying to do. In next weeks article we will discuss the process you need to follow if you chose the Investor Led equity crowdfunding approach.
You must read the following article written by Department of innovation and skills.
If you want to develop your knowledge.
It includes the trends the UK is starting to see in equity investor crowdfunding. Plus it reviews some of the deals that have already taken place. One thing you will quickly identify is the increase over the last few years in equity investor crowdfunding deals.
A few facts to consider
- Technology was the sector with the highest number and value of investments, in line with its performance in the wider market
- Companies whose products or services are consumer-facing were particularly successful, such as mobile apps, food and drink and musical theatre
- London, the South East and the South West were the regions with the most deals and investment.
- Crowdfunding is having a significant impact on seed-stage activity in the UK equity investment market
I would just like to thank you for taking this time to read my article. I hope you found it useful. You will need to spend quite some time completing your research before jumping into equity based crowdfunding. If you are seeking investment please share below the issues you are and have been facing. Wendy