Equity Crowdfunding for Beginners

Equity crowdfunding is a mechanism by which a large number of private investors are brought together on an online platform for the purpose of buying shares in an early stage company.  If you are familiar with the popular television programme Dragons’ Den, then you understand the concept of a group of private investors coming together to buy shares in a company.  Equity crowdfunding is very similar to this.

For companies that need to raise capital, there are a lot of options they can choose from, but there is no question that raising money is hard.  It doesn’t happen with the snap of a finger.

Pitching to friends and family, selling a product before it exists, figuring out which of your friends or LinkedIn connections knows a VC, then eventually pitching to that VC if you can even get the meeting, determining which bank gives fair-termed loans and even what terms are fair.  None of these options are easy.

How many credit cards can a founder open before overextending their ability to pay on time?

Eventually, entrepreneurs must turn to outside sources of capital to give themselves enough runway to create a profitable business, and where that capital comes from and on what terms are questions that must be carefully weighed before a decision is made.

Luckily for entrepreneurs, there is now another door that entrepreneurs can open to access capital: equity crowdfunding.

In essence, equity crowdfunding is raising capital from the crowd through the sale of shares, in a private company (that is not listed on stock exchanges).

Profile of Investors

In the UK, it is necessary for private investors to be accredited before they can invest in an equity crowdfunding campaign, and this requires the investor to answer a number of questions on the crowdfunding platform before the account may be opened.  Investors must be over the age of 18 and there are limits on how much an individual investor can invest, based on their income and net worth.

As equity crowdfunding is a regulated service in the UK, investors are also required to provide proof of identification and residence before they can invest.  Other than these restrictions, equity crowdfunding is accessible to millions of potential investors in the UK, regardless of location, gender, race, wealth or academic qualification.

It has been said that equity crowdfunding democratises investment opportunities, because small to medium-sided investors can now invest in exciting new businesses on the same basis as wealthy investors and fund managers.

Difference Between Equity Crowdfunding and Reward-based Crowdfunding

Reward-based crowdfunding involves individuals contributing comparatively small amounts of money to projects in return for some kind of reward.  The size of the reward is usually a reflection of the amount contributed.  Kickstarter and Indiegogo are examples of sites that offer reward-based crowdfunding.

The key difference between a crowdfunding site like Kickstarter and an equity crowdfunding site, like Seedrs or CrowdCube, is what is being sold.

With Kickstarter campaigns, entrepreneurs raise capital through the presale of their product, often at a discount, or through tiers of various perks to attract their fans and potential customers.  Once the “investor” of a Kickstarter campaign receives their product or perk, the contract between the company and investor is over.

With equity crowdfunding, companies sell shares in the form of equity in the company, giving investors what is colloquially known as ‘skin in the game’.

We have created this website to appraise equity crowdfunding campaigns on the major UK platforms.  Make sure to register as a member if you would like to receive independent campaign appraisals, straight to your Inbox at no cost.