Crowdfunding: Is it for me? What do I need to know?

In recent years, crowdfunding has become a popular way for businesses to raise much needed finance away from the more traditional sources. If you’re thinking about using it to raise cash, here are some things to bear in mind before you take the plunge:

• More often than not, crowdfunding is an equity give-away. Think Dragons’ Den. In return for your investors’ money, you’re giving up some of your shares – that means you’re giving up votes, dividend income and ultimately, a slice of ownership.

• Shares are for life, not just for Christmas! When you give shares away, it’s usually a permanent change; you can’t get them back when you’ve had enough of your investors or once your business has become successful. However, you can put conditions on your shares before you allot them by setting specific terms on which they are to be issued. You can also have a shareholders agreement between you, your company and your investors creating certain rights and obligations between the shareholders, but these are not always going to be appropriate for the mass marketing crowdfunding platform.

• Gather as much information as possible before you jump into crowdfunding. The concept has been around for a while and so there’s lots of media coverage of success stories and tales of woe. Talk to other businesses who have been through the experience and learn from their mistakes.

• Get ready! Crowdfunding is not something you can do on a whim and there’s no point in rushing at it. You’ll need your pitch – including a detailed business plan and accurate forecasts – and your legals all in shiny, polished final form before you open the doors. Once you’ve got interest, it’s hard to change these things.

• Be honest. Don’t twist the truth or put a sales spin on replies to enquiries from potential investors. Investors often appreciate honesty. Plus, the last thing you need is to get the funding you’re seeking, then face claims that you misrepresented the business and its potential.

• Be prepared to spend time on administration. Lots of new investors will need lots of new paperwork! Know up front what you’re going to need but also what you’d like to do. Some things aren’t legal necessities but are investment niceties – like keeping your investors up to date on the progress of the business. All these things take time away from actually working in your business so make sure you have the resources to deal with them.

But if you’ve got all that covered, good luck and happy crowdfunding!

Here at Farleys our specialist commercial law solicitors can provide financial advice to help your business fund its growth. For further information on how we can assist you contact us today0845 287 0939. Alternatively please complete an online enquiry form.