Crowdfunding Your Startup - The Future of Startup Funding

  • 2012-01-30, summary by Dan Dascalescu
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There are two ways of raising funds from unaccredited investors right now, before the crowdfunding law gets signed into law:

  1. Taking unaccredited investors, up to 35, using a special regulation
  2. Accepting contributions, but not in exchange for equity, loans, or bonds

"Crowdfunding" for equity is currently not legal

Sophisticated investor = over $1M net worth or $200/k yearly income for the past 2 years.

Unless you have a pre-existing relationship with potential investors, you're doing a "general solicitation", which is prohibited by SEC regulations.

When reaching over 500 shareholders and (or?) $10M assets, the company must go public. This is why Facebook is doing an IPO (not because they'd need more capital).

After approval of the existing crowfdunding bill, don't go sell securities before the SEC rules are issued (which could take 1-2 years). Before the SEC publishes rules, you can seek a "no-action letter": present what you want to do, ask if it's OK.

Caution: 1. many small investors = risk of trouble: they can demand inspection of books, shareholders meetings, or they can call often to ask about their investment etc. 2. hard to get angel/VC funding later: a. because of 1. b. it means you weren't able to raise angel funding 3. gets you closer to the 500 shareholders of record limit (excludes option holders).

Crowdfunding by accepting contributions

This model is being facilitated by websites like KickStarter or IndieGoGo.

When crowdfunding, you need to offer perks: * autographed materials * phone call/dinner with the founders * Tweet about the contributor * people love to name parts of products

Jitu B found his team on Kickstarter: videographer, marketer He supported 20-30 products on Kickstarter without getting the product.

Tom Dawkins: 30% of the projects get NO donation. Campaigns with weekly updates raise 100% more funds. Twitter / Facebook are asynchronous media: if they miss your tweet/update at that moment, it's gone.

Non-US investors are ok for security solicitation (do a "Reg S issue").

Two ways to raise money:

  1. pre-sale of product. The most funded Kickstarted product is pre-selling touch-sensitive watches.
  2. be a non profit

Large gifts (over $15k/year) are taxable.

Q: As a funded for-profit startup, can we raise contributions?
A: Erica Leibovitz: yes, we can raise more as a funded for-profit startup. We just need to be transparent. People who pre-bought do ask for money back if you fail, unless you tell them and they forgive you.
A: Tom Dawkins: not much precedent.

Q: Say you're an entrepreneur starting a coffee show. Can you pre-sell cups of coffee, knowing that you may not be able to honor the contract?
Ethan Stone: Yes, as long as you clearly specify that in the perk's description.

Crowdfunding websites

  1. IndieGoGo: Campaign creation and idea funding

  2. Kickstarter: Supporting a wealth of creative projects

  3. 33 Needs: Connecting microinvestors & social enterpreneurs

  4. Buzzbnk: based in UK

  5. ProFounder: Investors share in the profits

  6. ChipIn: Embed a widget, raise $

  7. Crowdcube: Equity-based investment community

  8. FundaGeek: Funding for tech innovation

  9. Peerbackers: Raise funds from your peers

  10. Sponsume: Free fundraising platform

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