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The Basics of Debt-Based Crowdfunding

Source: 401kcalculator.org

Source: 401kcalculator.org

Attaining funds is a critical step for many entrepreneurs. Fortunately, innovative concepts like crowdfunding, where funds are collected from a large, dispersed pool of investors, have provided entrepreneurs with alternatives to traditional funding sources like financial institutions and venture capitalists. According to an industry report, in 2015, the global crowdfunding industry surpassed $34 billion in estimated fundraising volume. In conjunction with the increase in crowdfunding transactions, crowdfunding sites have multiplied. These sites come in a variety of different forms and provide entrepreneurs the ability to customize their funding campaigns. Common types of crowdfunding sites, in their simplest form, include:

Equity-Based – investors receive a portion of the company in exchange for funds

Reward-Based – investors receive goods or services in exchange for funds

Donation-Based – individuals provide contributions

 

While these three types comprise a large sector of the crowdfunding market, entrepreneurs and investors also commonly use debt-based sites, which accounted for $25 billion in estimated fundraising volume in 2015. In a debt-based crowdfunding transaction, rather than receiving equity in exchange for capital, investors receive a debt instrument, often in the form of a note or bond, with a fixed repayment term and a specified rate of interest. Most debt-based sites are free to register and require borrowers to submit financial information before receiving a customized interest rate and credit risk. Entrepreneurs favor these sites because the interest rates are often lower than or competitive with interest rates at traditional financial institutions. It is important to keep in mind that this type of crowdfunding campaign is not for every entrepreneur. Rather, it is particularly advantageous for entrepreneurs who have difficulty meeting market demand for their service or product.

Debt-based crowdfunding has been described as a “win-win” because it provides investors with a relatively low-risk return and entrepreneurs with the ability to retain equity. However, one inherent risk to investors is the fact that these loans are often unsecured and leave little recourse in the event of default. The growth of the crowdfunding industry has alleviated some of these investor concerns, as several debt-based platforms boast impressive track records. Three examples of such sites include:

 

Lending Club:

  • Founded: 2006
  • Total Amount of Loans (individual loans and business loans): Over $20 billion
  • Interest Rate Range: 5.32–30.99%

Funding Circle:

  • Founded: 2010
  • Total Amount of Loans: Over $2 billion
  • Interest Rate Range: 5.49–27.79%

Prosper:

  • Founded: 2006
  • Total Amount of Loans (individual loans and business loans): Over $6 billion
  • Interest Rate Range: 6.88–31.10%

It is undeniable that debt-based crowdfunding has experienced a dramatic growth over the past decade. Yet, citing a limited pool of investors and an influx of loan applications, critics warn that perhaps the “novelty” of debt-based crowdfunding is coming to an end. It remains to be seen whether this is the case.

For now, because the laws concerning crowdfunding remain in flux, entrepreneurs should stay informed. Visit the following links to learn more about crowdfunding:

CrowdFund Intermediary Regulatory Advocates

Crowdfund Insider

Crowdnetic

Crowdfund CPA

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A Quick Primer on Title III Equity Crowdfunding: Drafting Your Term Sheet (Part 3 of 3)

Now that the SEC has passed its equity crowdfunding rules, it will be interesting to see if "market" terms emerge.

Now that the SEC has passed its equity crowdfunding rules, it will be interesting to see if “market” terms emerge.

While it remains to be seen how and to what extent crowdfunding will take off, here are a few things to keep in mind as you start thinking about possible deal terms on your first crowdfunding operation. I should note that ultimately, I anticipate that entrepreneurs will gravitate toward terms suggested by the most popular funding portals, and that these terms will become the market standard. Nonetheless, you’ll still have to come up with the economic and control terms of the deal yourself, and I hope this article helps you think critically about such terms as you do.

  • Valuation – Valuation is a function of the amount being raised and the percentage of the company being purchased. Current practices involve a negotiation between the investors and the entrepreneur, whereas crowdfunding will let the entrepreneur set the terms. In Venture Deals, Brad Feld and Jason Mendelson warn of setting your valuation too high due to the risk of not achieving a higher valuation at the time of your next round, causing dilution of your original supporters. While crowdfunding investors might not have the same anti-dilution protections as VC investors, there still might be risks from a subsequent down round due to the investors’ expectations going unmet. The takeaway here is to be reasonable in your valuation and have a solid plan on how you’re going to use your funds to build and create value in the business.
  • Number of Shares – Angel investing in seed rounds typically acquire between 20%-35% of the company—any more than that could hurt your ability to raise future rounds. Of course, with new types of companies entering the mix, common practices may not hold. Consider having your CFO use a <a href=”https://www.cooleygo.com/documents/sample-cap-table-pro-forma/”>pro forma cap table</a> to run through a few hypothetical future financing scenarios, and let where you hope to end up inform where you might start.
  • Protective Provisions – Freedman and Nutting anticipate a future in which funding portals may opt to allow investors to pool their funds into a single entity that could serve as an agent of the “CF class” and possibly negotiate a board seat. Until that becomes a reality in the U.S., you can expect investors to pay special attention to the veto rights they are given.In negotiated transactions, investors almost always have the right to vote when an issuer (1) alters the rights of the issued shares, (2) changes the authorized shares of common or preferred stock, (3) creates a new class of shares having rights, preferences or privileges senior to the issued shares, and (4) wants to merge or be acquired. I can’t imagine many investors signing up to invest without (1)–(3), but we’ll have to see how investors respond in a system in which the terms are set by entrepreneurs.Note that Section 4A(b)(1)(H) requires “a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered,” so failing to treat your investors fairly will likely negatively impact the economic terms of your offering.
  • Drag-Along/Tag-Along Rights – Drag-along rights ensure that if you want to sell the company, you can compel other shareholders to sell their shares on the same terms. Tag-along rights provide corresponding rights for investors and ensure that they have the option to sell their shares on the same terms if you sell the company.Drag-alongs tend to be more controversial when they are being requested by investors in a new round, in which case they could force an entrepreneur to sell her company even if she didn’t want to. When being imposed on crowdfunded investors, they simply allow you to capture the full value of your equity in the event of a sale. You’ll almost certainly want them given the large number of shareholders inherent in crowdfunding transactions. It’s tough to think of a reason why you wouldn’t want to offer investors tag-along rights—which is likely why both drag-alongs and tag-alongs appear in the suggested term sheet on UK crowdfunding site Seedrs.

Of course, no deal is the same, and you should always work with an attorney experienced in this field when creating a financial offering.

Part 1 of this series is here and Part 2 of this series is here.

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A Quick Primer on Title III Equity Crowdfunding: Is Equity Crowdfunding Right For Your Startup? (Part 2 of 3)

Even though equity-based crowdfunding is now legal, it might not be right for you.

Even though equity-based crowdfunding is now legal, it might not be right for you.

This is part 2 of our series on equity based crowdfunding.  Let’s take a step back from the brave new world of equity crowdfunding and think back to the existing model of getting early stage funding through networks of angels and VC’s. Hasn’t this system worked until now, and will startups be missing out if they stray from the beaten path?

We’d be remiss to forget that angels and VC’s provide more value than just capital. Experienced investors will challenge your assumptions and send you back to the whiteboard a few times before providing capital, which can ultimately improve your business outlook in the long run. Post-financing, these investors also serve as valuable mentors and advisors, providing expertise and a rolodex of people that can help your business blossom. And even though these investors are loathe to sign confidentiality agreements, you’re generally safe to meet with these folks with the understanding that your financials won’t wind up in the hands of a competitor. All this is to suggest that simply because you might no longer need the traditional conduits for seed capital, it doesn’t follow that they won’t be one of your better options.

But rather than compare crowdfunding to the traditional early-stage/seed model on the merits, it may be more accurate to think of it as opening up entrepreneurial finance to businesses that didn’t have much access before. In Equity Crowdfunding for Investors, David Freedman and Matthew Nutting predict that while crowdfunding will eventually attract all types of businesses, early adopters may be limited to certain types, such as consumer products businesses with a devoted fanbase, for-profit businesses supporting a social cause, community-based retailers with investors that have a direct connection to the business, and creative projects such as films, music, and games. Many of these might not quite qualify as a “homerun” to an angel or VC, but could still attract investment for a variety of reasons.

Here are a few questions to ask as you grapple with the question of whether to seek a Reg CF round:

  • How many rounds do you plan on raising in the future? Ideally, your first Reg CF round should be enough to get your project off the ground, and subsequent rounds will also be crowdfunded. I have personally heard one VC state that as of now, he would refuse to invest in a company with a large number of unaccredited investors. That’s not to say that this is a widely-held belief of VC’s or that the industry doesn’t stand to change; but if you anticipate seeking VC funding in the future, a crowdfunding round may be too much of a hindrance in the long term.
  • How competitive is your industry? Are you developing tech that will be the next big thing in virtual reality? The next cure for a heavily-researched disease? If confidentiality, trade secrets or other IP are a major concern, or the industry in which you operate is extremely fast-paced, you may want your investor profile to be as lean as your startup. While drag-along rights (discussed in Part 3) coupled with the founders maintaining control over the company may make receiving stockholder approval for major transactions less of an issue, you’ll want to think about how the disclosures mandated by Reg CF will affect your financing strategy.
  • How big do you plan on getting? Reg CF is overall, less burdensome. But if your company will someday be the size of Facebook (which it will be, of course), then the costs associated with other exemptions may not be a huge concern, all things considered. Of course, if the $1 million cap on Reg CF rounds simply won’t meet your needs, then you should certainly seek alternative exemptions rather than impede your business early on.

You can find Part 1 of this series here.

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A Quick Primer on Title III Equity Crowdfunding: Starting-Up as a VC (Part 1 of 3)

The SEC's equity-based crowdfunding rules went into effect on May 16, 2016.

The SEC’s equity-based crowdfunding rules went into effect on May 16, 2016.

In the same way technology empowered anyone to become an entrepreneur, so too will it enable anyone to step into the shoes of a venture capitalist. April 5 marked the 4th anniversary of the JOBS Act’s signing by President Obama, but the final rules which implement Title III, which pertains to equity crowdfunding, went into effect on May 16, 2016.

While the creation of a more legitimate crowdfunding industry can be seen as a major step in the democratization of capital markets, it’s not as if the barriers to entry are being completely leveled—entrepreneurs and investors alike will still have to be conscientious of the investment restrictions, disclosure requirements, and other limitations before determining whether equity crowdfunding is suited to finance their ventures.

In this first part of this three-part series, we clarify some terminology for those completely new to the concept of equity crowdfunding and give a quick overview of the regulations themselves. In Parts 2 and 3, we’ll help you use some of this information to determine whether crowdfunding is right for your business and some things to think about when you raise your first round.

Terminology

If you’re confused by the foregoing because you’ve been funding new ventures through Kickstarter for years, don’t feel bad; people often speak of “crowdfunding” generally without distinguishing between equity crowdfunding and other types.

Crowdfunding simply refers to the practice of funding a project through a large number of donors. In the past, people have initiated crowdfunding campaigns through platforms like IndieGoGo and Kickstarter in which donors typically receive certain perks or rewards for early presales or donations.

Equity crowdfunding involves the offering of equity securities to investors online. Investors purchase an actual ownership stake in the business entity with an intent to share in its financial returns and profits. It’s a close cousin of debt crowdfunding or peer-to-peer lending, which involves the offering of debt securities to groups of lenders online.  Debt crowdfunding sites like Lending Club and Upstart have already taken off.

In the U.S., the sale of securities implicates federal securities laws, as well as state “blue sky” laws. Issuers must either register their securities with the SEC or find an exemption (…or, face serious penalties).  Until recently, startups nearly always structured early stage offerings to fall under Reg D, a set of three rules—504, 505, and 506—which carve out exemptions to the registration requirements of the Securities Act of 1933, which we described in great detail in an earlier post. Because Reg D fails to provide startups a way to reach larger pools of investors, the SEC created another avenue by amending Regulation A (now referred to as Reg A+), as described in our prior post. Reg A+ allows companies to file a single, less costly registration with the SEC as opposed to one under each state’s blue sky laws, but given the need for audited financials (and a track record of legal, audit, and underwriting fees sometimes exceeding $1M), Reg A+ is not always suited to early/seed stage companies.

Enter Regulation CF

To fill the vacuum of ways for startups to raise seed capital from a large number of investors, Title III added Section 4(a)(6) to the Securities Act to create an exemption from registration for certain crowdfunding transactions.

Amounts Raised

Section 4(a)(6) sets a hard cap of $1M per 12-month period for any entity raising funds. This may seem low, considering that the median convertible note round last year was $1M, on the rise from years prior. However, it’s possible that the sort of crowdfunding enabled by Reg CF will itself change the way startups raise money by eliminating the need to pull together a syndicate of interested accredited investors and gather funding in a single transaction.

Investment Limits

The SEC doesn’t want you to get carried away as you start channeling your inner Mark Cuban. If you make less than $100,000, you can invest the greater of $2,000 or 5 percent of your annual income or net worth in a 12-month period. If you make over $100,000, you can invest up to 10% of your annual income or net worth (but in no cases greater than a total of $100,000) per 12-month period. Transactions must be done through an intermediary registered as a broker-dealer or a funding portal.

Entrepreneurs Who Can Stop Reading Now

Some companies aren’t eligible to use the Reg CF exemptions. These include:

  • Non-U.S. companies
  • Exchange Act reporting companies
  • Certain investment companies
  • Companies that are disqualified under Reg CF’s disqualification events (which include the conviction of crimes, court orders against engaging in the sale of securities, and other regulatory actions against the issuer)
  • Companies that have failed to comply with the annual reporting requirements under Reg CF during the two years immediately preceding the filing of the offering statement, and
  • Companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Resale Restrictions

Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year. Investors should consider themselves in it for the long haul.

Disclosure

How will investors know what they’re investing in? Issuers are going to have to disclose in their offering documents information that includes:

  • Information about officers, directors, and owners of 20 percent or more of the issuer
  • A description of the issuer’s business and the use of proceeds from the offering
  • The price to the public of the securities or the method for determining the price
  • The target offering amount
  • The deadline to reach the target offering amount
  • Whether the issuer will accept investments in excess of the target offering amount
  • Certain related-party transactions
  • A discussion of the issuer’s financial condition
  • Financial statements of the issuer that are accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.

An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless they’ve already had their financial statements audited. Issuers are also required to file an annual report with the SEC and provide it to investors.

Check out Part 2 of our series here.

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Financing a Startup Company Series: Crowdfunding 2.0 – Equity Based

If implemented, the JOBS act may make equity-based crowd funding legal.

If implemented, the JOBS act may make equity-based crowd funding legal.

This post continues our Financing a Startup Company Series and focuses on equity-based crowdfunding.

A relatively new model for crowdfunding (Crowdfunding 2.0) involves issuing equity to members of the general public in exchange for money.  In the past, companies were prohibited from advertising to the general public when attempting to sell stock (think posting on Facebook that you are accepting investors, or offering stock for Kickstarter donations).  Further, the types of people who could invest in startups were also limited.  The only options for startups to sell to the general public were to issue stock through an IPO (expensive and limited to later stage startups), or by navigating the complex rules governing private stock offerings.  The private stock offering rules are complex and among their numerous restrictions prohibit advertising the offering to the public, limit the number and wealth of investors.  For example, Rule 506 allows raising up to $5MM from the sale of stock to an unlimited number of Accredited Investors, but only 35 non-Accredited Investors.  Accredited Investors are generally people with $1MM in net worth excluding their home, or $200K annual income.  Because of the complexity of the SEC regulations involved with the raising money from investors (whether through public or private offerings) make sure that you consult first with an attorney who has experience assisting startups with these issues.

Because of the ban on general advertising, raising money through equity-based crowdfunding was exceptionally difficult.  A few crowdfunding portals, such as Crowdfunder, legally offer equity-based crowdfunding by only allowing carefully vetted Accredited Investors to participate.

In the near future, however, the process of selling to the public should become somewhat less restricted: in 2012, Congress passed the JOBS Act, instructing the SEC to write regulations to enable wider use of equity based crowdfunding.  When finalized, the regulations will likely allow companies to reach out to the public at large for cash in exchange for equity.  While this potentially opens the door to selling stock in an early stage startup to the general public, there will be regulatory strings attached.  The proposed rules issued by the SEC this fall (2013) impose the following regulations:

  • Equity based crowdfunding will only be allowed through regulated funding portals.
  • The maximum amount of funds a startup may raise using equity based crowd funding will be capped at $1MM per year.
  • Over a 12-month period, individual investors with incomes below $100,000 may only invest up to 10% of their annual income or $2,000.  Investors with incomes greater than $100,000 may invest 10% of their annual income, up to a maximum of $100,000.
  • Companies that pursue this model may have to provide an annual report to the SEC and audited financial statements (an expensive undertaking) to their investors.
  • The securities that are sold will likely have resale restrictions imposed by the SEC.

These are only some of the regulations, and the SEC has not yet finalized the rules.  Thus, reaching out to the general public to offer equity for cash remains off limits.  Once the regulations are finalized, before attempting to use equity based crowdfunding, consult with a knowledgeable attorney to avoid running afoul of the SEC rules.

Even when equity-based crowdfunding is allowed, the following potential issues will still exist:

  • Materially misleading statements in advertising materials can still lead to §10b-5 antifraud liability.  Antifraud violations are much more serious than false advertising claims and can be ruinous for a company and its executives.  Consult with a lawyer before posting what your marketing person creates.
  • State securities laws still cover the investors in their territory and can require a filing notice and payment of a fee.
  • In order to raise funds, you will need to pitch your business to the public.  This may mean that your company has to disclose to competitors information about sensitive, confidential, technology or business plans.
  • There will likely be ongoing responsibilities to report to the shareholders on the financial and business performance of the company.  These can be expensive, time consuming, and open the door for antifraud liability.
  • Even if equity-based crowd funding becomes legal, and common, one should also consider whether other sources of financing, such as sophisticated angels and VC’s, will invest in a company that has raised equity-based crowd funding.  It might be the case that VC’s will not want to get involved with a company that has so many shareholders.

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Financing a Startup Company Series: Crowdfunding 1.0 – Reward Based

Entrepreneurs may be able to raise seed capital by attracting relatively small amounts of money from a large group of individual investors in the crowd.

Entrepreneurs may be able to raise seed capital by attracting relatively small amounts of money from a large group of individual investors in the crowd.

This post continues our Financing a Startup Company Series and focuses on rewards based crowdfunding.

Crowdfunding describes the process of getting a large number of people, or investors, to each give small amounts of capital, usually via the internet.  A relatively new source of funding for startups, Crowdfunding is rapidly evolving and becoming a source of funding to an ever-widening array of companies.  Initially a source of funding for art and creative projects, it has grown to be a forum for launching hardware and software projects, such as the OYUA video game console, social media, marketing and financial services companies.  Two of the biggest crowdfunding portals are Kickstarter and Indiegogo, however there are hundreds of other crowdfunding websites out there.  Forbes has a good list of 10 of the biggest crowdfunding sites and their specialties.

A company seeking to use crowdfunding to launch a product or service can structure the deal with investors in a number of ways.   First, in exchange for money, the company can offer an early release of the final product, named credit on the company website, and teeshirts or other rewards.  This is called donation or reward based crowdfunding (or Crowdfunding 1.0) and is the model employed by Kickstarter and Indiegogo.

Beyond the money raised, crowdfunding campaigns can provide a number of benefits, but also come with risks:

  • A successful campaign can generate huge amounts of buzz.  Because the fundraising is public, the mainstream press can easily pick up stories about companies that succeed their funding goals.   This advertising exposure can lead to more sales once the product or service goes live.
  • An unsuccessful launch can provide market feedback, and allow for a strategic pivot, before too much time is spent actually bringing the product to completion.
  • Because no money is released from the crowdfunding campaign until the goal amount is reached, an unsuccessful campaign could end up being a waste of time that produces no funds.
  • Be wary of releasing or publicly disclosing IP secrets.  After publicly releasing or displaying an invention, a US patent application must be filed within 12 months, or else patent rights will be forfeited.  In other countries, public disclosure before filing for a patent can completely bar a patent application.  Additionally, disclosing IP secrets, or “trade secrets”, makes it easier for competitors to copy your product, or improve their own products using your ideas.
  • Crowdfunding campaigns don’t give startups access to a networks of advisors and mentors like angels or VC can do.

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Equity-Based Crowd-Funding and its Risks for Entrepreneurs

"Crowdfunding" refers to the use of small amounts of money from a large number of people to fund a venture.

“Crowdfunding” refers to the use of small amounts of money from a large number of people to fund a venture.

Background to Crowd-Funding and the JOBS Act

With the passage of the Jumpstart Our Business Start-ups (JOBS) Act in April of 2012, entrepreneurs will soon be able to give equity stakes in their start-up companies to individuals who invest through registered crowd-funding sites. While proponents of crowd-funding maintain that allowing start-up companies to sell equity through crowd-funding will boost capital for start-up companies, entrepreneurs should be aware of risks and drawbacks involved with crowd-funding.

Currently, companies who raise money through crowd-funding cannot provide equity in exchange for crowd-fund investments. Rather, their investments are rewarded with small tokens or perks, such as receiving a new product or having their name listed on a website.  Kickstarter is a common example of a “crowd-funding” site that allows contributions to startups in exchange for tokens or perks other than equity. Without journeying too deep into the swamps of security regulations, it suffices to explain that, prior to the JOBS Act, companies that sold securities had to either register those securities or qualify for an exemption to the registration requirement (e.g., selling only to accredited investors under Rule 506 of Reg D).  Absent registration, a company could not solicit its securities to potential investors who did not have a substantive and pre-existing relationship with the company.  Additionally, companies who issue securities to more than 500 investors and have more than $10 million in assets were required to essentially go public.  This made selling equity to a broad group of investors virtually impossible.

In response to the perceived compliance cost barrier for start-up companies, Congress and the Senate passed the JOBS act, which President Obama signed into law in April. Along with across the board financial deregulation, the law carved out an exception for crowd-funding in securities law. Under the JOBS act, companies may issue securities to investors, even absent a substantive pre-existing relationship, provided that the aggregate amount raised through crowd-funding is no more than 1 million dollars, the amount contributed by any investor in one year does not exceed limits based on the investor’s annual income, equity is issued through a registered crowd-funding portal, and certain other requirements are met. Also, crowd-fund investors no longer count towards the 500 investor limit.  The SEC has not yet promulgated regulations on crowd-funding, so details are still unclear on how the SEC will regulate crowd-funding portals.

Much has been written about the need to protect crowd-funding investors, who often overestimate their investment’s potential and tend to be less cognizant of investment risks, tax consequences, and the lack of a secondary market for their investments. While investor protection is important, crowd-funding may also pose dangerous pitfalls for entrepreneurs.

Crowd-funding may deter subsequent investors

First, entrepreneurs who rely on crowd-funding for their first round of investment may find it more difficult to attract venture capital or angel investors in subsequent financing. Start-ups that ultimately achieve an IPO typically require multiple rounds of financing, with each new round of investors negotiating terms with existing investors. In the case of a start-up that relies on crowd-funding for seed stage capital, subsequent investors will find it difficult, if not impossible, to negotiate with a large number of prior investors, each with a small stake in the company. The overall effect is that start-ups may find that their successful crowd-sourced financing may actually deter subsequent investments.

Crowd-funding may jeopardize IP rights

Second, companies eager to post their product or business idea on a crowd-funding site can easily lose any intellectual property rights they have in their products or ideas. While entrepreneurs  pursuing capital from traditional investors will typically engage in smaller, more controlled discussions, raising capital using crowd-funding necessarily involves disseminating the idea to the public. As such, the entrepreneur will not be able to control who has access to its information or impose confidentiality terms with would-be investors.

Difficulty in managing investor expectations

Entrepreneurs are notorious for overestimating the value of their company and underestimating their projected expenses. While venture capital firms may have more experience valuating start-up companies, crowd-fund investors often do not appreciate the amount of capital and length of time required for businesses to turn a profit, and expect their investments to make faster progress than the company is capable of. In an article titled “Success of Crowd-funding Puts Pressure on Entrepreneurs“, the New York Times describes several companies that quickly became overwhelmed with the task of managing the sudden influx of investors, and the entrepreneurs ultimately found themselves spending an exorbitant amount of time and effort responding to investors inquiries and demands.

Entrepreneurs should carefully assess whether crowd-funding is appropriate for their particular business needs

It goes without saying that the local bakery has different financing needs than a multi-national  company. Likewise, the social entrepreneur and the founder of the next Google will need to approach crowd-funding from separate angles. Some entrepreneurs will thrive on the ability to remain independent in crowd-funding, and can build a successful business off one round of financing. Others will find that crowd-funding poses unacceptable risks to their IP strategy and expose them to liability. As always, entrepreneurs should carefully assess their own business position and long-term strategy before approaching investors, especially if the investors are crowds of strangers on the internet.