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Benefits and Drawbacks of Equity Crowdfunding for Startups

What does Equity Crowdfunding mean?

Equity crowdfunding is a process that helps startups or entrepreneurial ventures gain money from a “crowd” i.e. multiple investors, in return for some shares of the company.

The odds may be in your favor sometimes, while at other times, the opposite may also occur, that means the investor might lose all of their investment.

An example of a platform for equity Crowdfunding is SyndicateRoom.

Check out also: 7 Crowdfunding Sites for Entrepreneurs

Who exactly is the “crowd”?

If you know about Dragon’s Den, you might have an idea about Angel investors or venture capitalists.

The crowd basically refers to a large group of wealthy people who can turn out to be potential investors. These people invest in unlisted companies at their own expense. Such investor’s annual income varies from $100,000 to $300,000 or more. They also have net assets worth $350,000 or more. Their ages range from 24-35 years.

How is Return made on an Investment?

Most of the startup companies end up failing, this is a fact known by all. It is understood by all that the failure of the company means no return for any of the investors.

Failures usually come before success, and it takes a time span of 3 years to 5 years, to know if the company sank or was able to swim.

The Shareholders/Investors

Before opting to get into this process, know the terms and conditions and the voting rights one can get against a particular number of shares. You get complete updates as an investor of the processes going on.

The Entrepreneurs

Entrepreneurs benefitting from equity crowdfunding can do things their way. Paperwork can be avoided and in the end of the day, the control stays in their hands.

The Legal Aspect

Equity Crowdfunding is in an evolutionary process and the legal aspect is still work in progress.

There are certain regulations for ECF portals that need to be followed.

The Benefits

  • Saves Time and Money

Instead of running around for bank loans, you have a way to gain money, while saving time.

  • Gives You Access to Capital

You are in dire need of capital, and ECF solves the issue.

  • Helps You Organize Your Marketing Strategy

In the process of convincing others to invest money in your project, you are also promoting your startup or idea on various platforms, that might help you gain future customers who are getting to know about it.

  • Gives You Control Over How to Reward Your Investors

It is up to you how and when you prefer to reward your investors.

The Drawbacks

  • Might Not Fund Large Capital Requirements

There are limitations to the capital that can be funded through ECF platforms. You might not get a large amount of funding from a single platform.

  • Follows an All-or-Nothing Approach

Yes, you read that right. The investors might earn way more than what they had expected, or they might end up losing all of it.

  • Makes Your Project Inflexible

Once the terms and conditions are decided, you can’t make huge changes.

The whole ECF thing seems lengthy and might tire you up but there is no harm in trying.

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─ April 23, 2016