How to use crowdfunding to finance a brilliant idea
The transformation of a global economy in the digital era was also affected in the ways how the start-ups look for funds to turn their brilliant ideas into reality. One of the most popular ways of funding your business outside of the bank loan, investment from investment angels is “crowdfunding”. If you have an excellent idea and you need an initial capital to start it crowdfunding is something you shall consider.
Vadim Blaustein, the CEO of BlauStein Lawyers, answers several questions about crowdfunding, legal aspects of crowdfunding, the procedures in place and states his opinion on crowdfunding.
What is crowdfunding? Who is using crowdfunding?
Vadim Blaustein: In it’s very essence, crowdfunding is a way of financing your idea or a project by collecting funds from people who believe in it and feel enthusiastic about it. We can simply say that crowdfunding is an alternative way of financing your idea. Crowdfunding is most commonly used by entrepreneurs, but there are also crowdfunding campaigns for social and charitable causes.
How big is crowdfunding as the financing tool?
Vadim Blaustein: It is rather big and constantly growing. For example, in 2012 around 14 million euros were raised in different crowdfunding campaigns, and 5 years later, in 2017 the figure is around 190 million euros. We witness the growth of popularity of this tool, which only shows its high relevance to start-ups.
What would you say are the campaigns that attract the most of the funds?
Vadim Blaustein: Generally, the campaigns associated with innovation, renewable energy and other contemporary ideas are raising more funds, but real estate, as well as creative projects are also on a rise.
So, businesses just ask for money online and people give it to them?
Vadim Blaustein: It is a bit more complex than simply asking the money I shall say. During the campaign the entrepreneur offers a reward to those who support the campaign. There are two types of crowdfunding campaigns based on the rewards they offer: receiving rewards and equity crowdfunding.
Receiving rewards campaigns are the campaigns where in exchange for the funds of the supporters the business offers some type of reward. For example, a discount when the product is launched, or a free product. The reward in this case is not a share in a company, and the person who gave funds has no legal rights in the business.
But how does it work then?
Vadim Blaustein: The funds are not of a significant amount for those who contribute and they support the idea, sometimes the reward they receive is satisfactory by the mere fact that they helped to launch a project.
And what about the second type of crowdfunding?
Vadim Blaustein: The second type is so called “equity crowdfunding” and it is relatively new. In this type of crowdfunding you may receive shares of the company that launches the crowdfunding campaign in exchange for your contribution.
Is it correct to conclude that the second type of crowdfunding requires significant legal support?
Vadim Blaustein: Absolutely. First of all, for equity crowdfunding the entrepreneur needs to incorporate a legal entity. Secondly, he needs to prepare the business model which is in line with the applicable legislation and interests of the idea. Thirdly, he needs to create terms and conditions of such an equity crowdfunding model, which will reflect the applicable legislation, tax implications, confidentiality and intellectual property aspects, and many other characteristics applicable to innovative ideas. There are many aspects to consider, and there shall be a tailored legal advice to each crowdfunding campaign that offers equity in exchange for funds.
What are the steps to be taken to initiate the crowdfunding campaign?
Vadim Blaustein: Step 1. Plan the campaign. Make sure you have an idea or a project that you can explain, what’s its purpose or application, the timeframe you need for execution of the idea or a project, the funds necessary to cover the idea or a project, the reward you are willing to give to those who support you.
Step 2. Describe your product and goals on paper so the potential investor can read, understand and get interested in your brilliant idea. Simply said, set your business model.
Step 3. Choose a platform. There are many different websites which offer a variety of advantages for different kind of campaigns. Choosing a platform is important as the platform offers different crowd that will support you in the end.
Step 4. Plan your legal and financial risks, tax implications and others in advance. Consulting an experienced lawyer and other professional may be crucial in how you formulate your campaign. Before starting your campaign, you need to bear in mind its legality, the regulatory requirements in the applicable jurisdiction and other legal risks. Even though this is a preparatory stage, it can change the entire outcome of your campaign if done wrong.
Step 5. Post a campaign, interact with your audience, and ensure that there is sufficient online coverage of your campaign. Assure those who supported you, or referred to your campaign that they made the right investment/choice. Your credibility is also assessed from how you communicate with those who are interested in your campaign, and those who already invested in it.
Do you believe in the future of crowdfunding?
Vadim Blaustein: I believe that crowdfunding offers exceptional benefits to the entrepreneurs, and strongly support such a liberal tool for financing the unique, innovative and necessary projects and ideas.