Rewards Based Crowdfunding
Rewards-based, or seed, crowdfunding is a type of small-business financing in which entrepreneurs solicit financial donations from individuals in return for a product or service. There are about 19 times as many rewards campaigns as there are for its closely related counterpart, equity-based crowdfunding.
HOW DOES IT WORK? Business owners describe their project or business idea and fundraising goal on a crowdfunding platform. In return for donations, businesses provide rewards. For example, a jewelry designer might reward everyone who contributes $100 with an original handmade bracelet, or an inventor of solar-powered lawn mowers might give a mower to contributors at the $1,000 level.
Rewards don’t have to be substantial; some businesses offer a simple handwritten thank-you note. WHO IS IT GOOD FOR? This type of financing is geared toward startups, particularly in creative fields, that don’t qualify for traditional small-business loans but have compelling projects or want to test a market. Small businesses with a complex product or service might want to explore traditional funding options; it might be hard to explain the value of your company in layman’s terms to a crowdfunding audience.
WHO CAN CONTRIBUTE? Anyone — family, friends, customers, business partners — can contribute to a rewards crowdfunding campaign. Individual donations are often small, so business owners need to persuade as many people as possible to pitch in. Often, the campaign is shared on social media with the hope that the business owner’s followers will, in turn, share the campaign with their networks.
IS IT FREE? Platforms typically charge a percentage that can be as low as 5% to as high as 13% of funds raised, and may charge an additional processing fee.
Rewards-based crowdfunding pros and cons Rewards crowdfunding allows small businesses to get new ideas off the ground without the burden of repaying a loan. Before jumping in, consider the pros and cons:
PROS It’s one of the cheapest ways to raise capital No collateral, credit check or previous business experience is needed The process is simple and doesn’t require professional financial or legal help You retain all equity and control in your company Exposure gained on the platform can help establish a customer base and brand awareness CONS Since you’re relying on individual donations, rewards crowdfunding isn’t the best option for businesses seeking large amounts of funding If you don’t reach your goal, you may have to forfeit any amount raised Pitching your idea online exposes it to potential donors — and to competitors. To avoid having your idea stolen, protect yourself with patents. How to get started To start a reward crowdfunding campaign, apply on a crowdfunding platform. The most popular platforms are:
GoFundMe Indiegogo Kickstarter
You’ll need a convincing pitch that appeals to as many people as possible, as well as attractive rewards at all donation levels. An entertaining, informative video can help sell your idea. For the broadest exposure, reach out to family, friends and associates via email and social media.
Equity Based Crowdfunding
What is equity crowdfunding You’ve probably heard the term “crowdfunding” before: perhaps in the context of a Kickstarter campaign or a GoFundMe page. It’s basically a financing model that collects small sums of money from a large number of people — i.e. the crowd — over the internet.
Equity crowdfunding uses that same basic model, but it's appropriate for startups, rather than causes and creative projects, and in return the backer gets a percentage of ownership or a financial stake in the company.
How is equity crowdfunding different from other types of crowdfunding? 1 Reward-based crowdfunding Is when you contribute money and get a reward in return. This is mostly used for creative campaigns, and there are often varying levels of rewards, or perks, that correspond to pledge amounts. Think Kickstarter and Indiegogo.
2 Donation-based crowdfunding Is when you contribute money without expecting anything of value in return. This exists largely to fund charitable causes, like building a well in Kenya, or personal campaigns, like helping someone pay their medical bills. Think GoFundMe, YouCaring and CrowdRise.
3 Equity-based crowdfunding Is when you contribute money to help fund the growth of a company, and receive a slice of the financial pie in return (but you can get perks too). These campaigns tend to yield much larger funding amounts. Think AngelList, FundersClub and Wefunder.
What is Title III and why is it a big deal?
Equity investing isn’t new, but in the past only “accredited investors,” or wealthy people who earn more than $200,000 a year or have a net worth of over $1 million, were allowed to take part. In theory, this was to protect the non-wealthy from bad decisions and financial ruin, but the flip side was that ordinary citizens were denied the opportunity to invest as they saw fit. For example, AngelList, the world's most popular online investing platform, only allows accredited investors to invest.
That all changed in May 2016, when the SEC launched the new rules under the name “Title III” (full name Title III of the Jumpstart Our Business Startups Act, also called Regulation Crowdfunding or Reg CF for short).
President Obama’s words after he signed the bipartisan act, designed to make it easier for small companies to fundraise: For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in. — Barack Obama
The rules stated that 1) entrepreneurs can now raise up to $1 million in a 12-month period from non-accredited investors, and 2) investors can invest a limited amount per 12-month period based on their income and net worth.
It might sound a bit dry, but this is big. We're talking democratization-of-finance big. It means potentially opening up to the masses opportunities once reserved for the rich. It means a level playing field, where citizens interested in investing are no longer treated differently based on the amount of money that they have. Why we’re excited
Because more investors mean more startups, and more startups means more social innovation and progress. This is what it looks like to fund the future.
That’s why Woodshed is focused specifically on Title III equity crowdfunding.
Why you should be excited Well, we think you should be. To help you decide if startup investing is for you, contact Woodshed Agency
Even if you’re not ready to invest right now, join a platform today!