What is a crowdfunding?

<aside> 💡 Crowdfunding – the process when a group of individuals fund a company either through equity purchase, debt purchase, pre-sale ordering of a product, or gifting of money.

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Tips and tricks

Generally there are 4 types of crowdfunding models:

1. Donation-based crowdfunding – the process when someone donates to a specific cause or charity (think GoFundMe).
2. Reward-based crowdfunding – the process when people donate to unlock a specific reward linked to the project they support. For example, you might help fund a new product line and later receive that product in return.
3. Debt crowdfunding – ****allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. Think of this as debt crowdfunding.
4. Equity crowdfunding – form of crowdfunding lets founders raise funds from the public in exchange for unlisted shares (equity) in the business. Unlisted shares aren’t listed or bought or sold on an official stock exchange. Equity crowdfunding is better for raising larger amounts than you could get through rewards-based crowdfunding.

Pros

• Founders have full ownership, control, and vision over the company.
• Founders being forced to build a business model that really works.
• Founders can move quickly and avoid fundraising delays..

Cons

• Founders lack access to smart money and other support/opportunities.
• Limited capital can limit visibility, marketing, and customer service, stifling growth.
• Preparing for crowdfunding can take a long time and require a significant investment of both time and money.
• Crowdfunding platforms can sometimes be expensive, with stringent regulations.

Deal example

• There are 2 founders: Steve and Ben. They decided to start a startup called Smoogle.

• Steve had an operational background, so he serves as CEO. Ben, an ex-engineer, serves as CTO. They establish the company in Delaware and issue 10,000,000 shares (basic number).

• Steve and Ben have agreed that Steve will receive 6,000,000 shares (60% equity) and Ben will receive 4,000,000 shares (40% equity). Take a look at how the cap table will appear:

  	Stocks	Number	Price / share	Equity
  Steve	Common	6,000,000	$0.00	60%
  Ben	Common	4,000,000	$0.00	40%
  Total		10,000,000		100%

• To cover pre-seed expenses ($100,000), they decide to take launch a crowdfunding campaign. People who donate will receive a complimentary sample of Smoogle once it launches. Their cap table will remain unchanged.

• This is a general example. Usually cap table and deal terms are more complex.