How to Share Equity Wisely
Crowdfunding experts unanimously predict a great flow of new businesses emerging under the welcoming umbrella of equity crowdfunding. This new funding option – a vast avenue of capital building – sheds a bright new light on the concepts of business ownership and equity.
Not too long ago, many business owners were forced to bootstrap their companies due to a narrow amount of funding choices. In the very near future, they will have the opportunity to share their stories, responsibilities and success with the very people who cheer for them. Sharing equity has a great deal of implications for both sides, as crowdfunding is an active type of investment and requires ongoing entrepreneur-to-investor communication. One of the first things your investors learn during a crowdfunding campaign is exactly how much of your company they will be able to buy. Before making this decision, consider the following:
Are You Ready for Equity Crowdfunding?
Unless you or your co-founders have a rich third cousin, you’ll most likely request a significant amount of money during your first round of capital raising. Whether you’re aiming for seed money or expansion funds, equity crowdfunding is your best bet if you haven’t been in business for at least three years – a background typically required by banks for approving company loans. Family, friends and friends of friends are about to be given the chance to pitch in and supply fresh companies with fresh capital in a fresh setting. And in exchange for their monetary support, the crowd gains part-ownership of the firms they fund. Before you put your offering out there, you must be 100% comfortable with the fact you are sharing your company and all its implications including keeping it lean, aiming for full disclosure, maintaining ongoing communication with your investors and paying dividends on equity.
Dividing Your Company’s Ownership
The core issue of selling equity securities is just how much control of your business you are willing to give up. The authors of the JOBS Act strongly advise entrepreneurs to never give up majority control of their business. More specifically, never offer more than 50% of the company’s equity when raising money through crowdfunding. The equity percentages essentially depend on two factors:
– The lifecycle stage of your business at the time of funding. Seed-stage companies need to acquire more capital, as no proven market actually exists yet, so there is only a unidirectional cash flow.
– How much money you need to raise in order to reach your goals. If you come up with a modest target amount ($20,000 instead of $1 million, the solicitation limit set by the SEC), this translates into having to give up less equity.
Equity, a Peek into the Future
After your first successful capital raising campaign, your business will get moving and start building value. With every goal reached and each day of survival in the business jungle, you become more confident in your company and more content with opting for raising money through equity crowdfunding. Things may be going so well that you may consider engaging in a second crowdfunding campaign in order to raise funds for another business location or expanding in other ways. For successfully sharing equity, you have to foresee this scenario even before planning your first crowdfunding campaign. If you’re willing to give up 25% of the company’s equity, set aside the first 12.5% for the initial round of funding and split up the remaining 12.5% for later rounds.
As the company grows and acquires new investors, ownership will dilute. When calculating how much equity you will be sharing, think strategically and visualize its long-term trajectory – the prospective good, bad and the ugly. Take into consideration all possible scenarios and make sure you fully understand the value of equity.
Thanks for being awesome and speaking your mind in the box below.