Revenue-Based Finance (RBF) is a type of capital provided to growing businesses in which investors give funds in return for a pre-determined percentage of ongoing gross revenues. Repayments are due until the principal and a predetermined multiple of revenue are paid back.

Equity-Based Crowdfunding

Equity-Based Crowdfunding is a way of raising money to finance projects and businesses based on small slivers of equity. Company owners typically utilize equity crowdfunding platforms to raise capital from their community of customers or backers. 

Equity-Based Crowdfunding is Not

Equity-Based Crowdfunding is not Rewards-Based Crowdfunding, also known as Creator, or Project Crowdfunding. Equity-Based Crowdfunding is also not Debt or Micro-loan Crowdfunders, in which capital funders expect to be repaid with or without interest.

Rewards-Based Crowdfunding vs. Equity Crowdfunding

 

Equity crowdfunding involves similar mechanisms to Rewards-based crowdfunding, but the capital raised involves the sale of securities in a private company, in the form of shares, convertible notes, debt, or revenue. 

When companies use rewards-based crowdfunding, they do not give up any ownership and the capital is therefore considered “non-dilutive,” meaning that for creators with companies, they do not give up any ownership to providers of this type of finance.

Equity-based crowdfunding is dilutive, but typically in small increments of many equity holders with small amounts, sometimes as small as $500 or $1000. In the US, for angel and venture investing, investors need to be accredited, meaning they have to make at least $200,000 a year or have a net worth of $1 MM (minus real estate holdings). But Equity Crowdfund investors can invest without meeting these requirements. 

Example Crowdfunding Platforms

Republic | Seed Funder | We Funder | Angel List | Start Engine

Is Equity-Based Crowdfunding the right capital for your business at this stage?

COMPANY PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

EQUITY CROWDFUNDER PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

When it Works Well

Company has a Community

Companies often overestimate the strength of their email list and social media connections and underestimate how many early potential customers are actually project backers. Those that do well actively cultivate a customer community who respond to any offer of engagement with the product, service, company, or founding team.

Financials Ready

Unlike Rewards-Based Crowdfunding, Equity Crowdfunding is regulated by the Securities and Exchange Commission in the US and companies must share their financials. 

Equity need Companies that test project funding pricing and understand the value being created for each type of reward tend to do better in the overall process.

 

Compliments other Capital

It helps if you’ve also been able to attract a lead established Angel Investor and have successfully raised funds in the past to give confidence that you know how to steward “other peoples’ money.” 

 

Challenges to Equity-Based Crowdfunding

Limits to Growth

If the company raises the max amount of $5 MM but needs more than that amount to fund effective scale and get to profitability, the company may stall and struggle. 

A successful Equity Crowdfunding on its own is not enough for the company to  proceed to later Venture Capital stages. 

Limits to Upside

A company that seeks profitability as a near term goal may not want to pursue additional rounds of funding or seek an exit strategy, when the company is acquired or sold. Investors then are left holding “illiquid” investments without necessarily clear paths or timeline for return.

 

Not Available Everywhere

Not all countries make it easy for investors to  receive ordinary shares when participating in equity crowdfunding. Instead, investments are considered as a financial contract so that investors participate in future cash flows or profit-participating loans, but investors do not have a say in the company’s strategy. 

 

Trends in Equity-Based Crowdfunding

Recent Limits Raised

The demand for new types of equity, debt, and real-estate crowdfunding platforms are accelerating with shifting legislation. The JOBS Act which legalized fundraising in exchange for equity ownership finally raised the limits for funding.  

The upper limit  in the US was raised from $1 MM to $5 MM in March of 2021, resulting in successful raises for companies like Gumroad.

Real Estate vs. Startups

Real Estate Equity-Based Crowdfunding was more successful at the start, potentially because the investments were backed by the asset. 

Meanwhile it’s taken time for high quality tech startups to raise money this way- they are higher risk, typically have no hard assets backing the investment, and have most of the value in the future potential of the founders, the technology, and the customers. 

 

Changing Investor Requirements

In the US, the SEC adopted new rules that allow certain investors to qualify as accredited not only by income and net worth requirements, but by profession and/or holding certain certifications. 

Wealth and income alone does not make for an accredit investors. This is enabling a younger generation of investors to participate in backing private companies. 

Before You Consider Equity-Based Crowdfunding

  • Do you have a large and engaged network who will show up to invest in your business? 
  • Do you have the time to manage a successful campaign? 
  • Are you certain about the timeline? 

Exploring Equity-Based Crowdfunding

  • Take a look at Republic, We Funder, and Seed Invest to see the different types of companies and creators across these leading platforms
  • Consider crowd investing to learn how it works  
  • Compare the time investment for running an Equity Crowdfunding campaign vs. fundraising other types of capital
  • Plan out your funding and capitalization strategy to figure out if Equity-Based Crowdfunding might be right for you, or if it compliments an overall capitalization strategy

Discover Alternative Capital

Equity Crowdfunding is one way to grow your company, and you can choose other capital types as an alternative or pair and combine at different stages of your business. Consider these alternative capital sources or explore our Capital Library.