Friday, June 5, 2015

Crowdfunding Explained

Let's define the four basic forms of crowdfunding:

1.     Donation-based crowdfunding, where money is given with no expectation of anything in return.

2.    Reward-based funding gives the donor something in return for the donation.

3.    Debt-based funding is a straight-up loan.

4.    Equity-based funding, which is currently only available to “accredited” investors. 

Investors in this group must prove a yearly income in excess of $200,000 (or $300,000 when combined with a spouse’s income) or have a net worth of over $1 million (excluding the value of their residence) and must have had that level of income or net worth for three years running. These investors receive equity in the company raising the capital in exchange for their contributions.

Crowdfunding takes two approaches to the funds collected: “Keep What You Raise” (aka Flexible Funding) or “All or Nothing” (Fixed Funding) where the final amount raised must reach or exceed a predetermined target. Crowdfunding sites generally charge a fee of 4 - 10% of money raised if the goal is met and some take a percentage of projects even if the goal isn’t reached.