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Crowdfunding can potentially be a deal-breaker for startups trying to raise a later stage of funding -- at least as it stands right now. I've heard from many S

by rexreed 14y ago

Crowdfunding can potentially be a deal-breaker for startups trying to raise a later stage of funding -- at least as it stands right now. I've heard from many Series A / B VCs that they will not invest in startups that have gone the equity-based crowdfunding route (that is, not the Kickstarter approach, but the new kind where equity is provided as per the new JOBS act), because they don't want to deal with hundreds of tiny investors. It's a nightmare for them. The only way to deal with these sorts of equity-based crowdfunding platforms if you plan to go for a later stage equity investment from a VC or other investment professional is to bundle all the unaccredited / crowdfunding investors into a single LLC or other entity and have that entity invest in the startup with terms that allow future investors to treat them all as a single class in much the same way they deal with accredited angel investors now.

wisty 14y ago
I think the JOBS act allows bonds, as well as equity.
- rexreed 14y ago
  I would imagine that if this was the case, the investors would want it to be treated like convertible debt. After all, who wants to invest in a highly risky project where the odds of losing all your money are near 100% to only be rewarded by a long-term debt payoff with interest in the single digits?
jrkelly 14y ago
FWIW, I think AngelList is already planning to do that bundling via SecondMarket with their crowd-funding offering: https://angel.co/help/invest#invest-3 https://angel.co/help/invest#invest-3 Q: Do startups have to deal with a million new investors? No. The overhead is the same as adding a single large investor to the round. All of the investors are pooled into a single fund which, in turn, invests in the startup. Only the fund is listed on the company's cap table—the individual investors are not. The fund also signs the investment documents, the individual investors do not.
- rexreed 14y ago
  This is the right approach, I believe. However, it has not yet been tested in the courts if an investor in the pool sues when he/she feel wronged when a future investor tries to cram down all these investors in a down round. It's inevitable to happen at some point, and it will probably be an issue given that most investors in the crowdfunding approach will be unaccredited investors. Right now as it stands, Second Market is only available to accredited investors (https://angel.co/help/invest#secondmarket https://angel.co/help/invest#secondmarket) and so the JOBS act crowdfunding rules don't apply here in the same way.
buro9 14y ago
In the UK I used http://www.seedrs.com/ http://www.seedrs.com/ to raise GBP 50,000 (in about 15 hours) for my startup http://microco.sm/ http://microco.sm/ One of the big reasons that I chose to use Seedrs, beyond being FSA approved, was that they become a single shareholder that I deal with. That is how they are in the terms and how I issued the shares. They hold all of the investor details (some 60 individuals who are already users of another site I run - my users are my investors) and have structured it so that the investors are buying the equity through Seedrs and Seedrs hold a record of that amount in their name. Effectively, Seedrs are a single proxy, but I never have to care about having more than 1 shareholder from a legal perspective (I do care, I speak to my investors, but that's a human angle rather than legal/accounting). I spoke to a few VCs first who voiced concern about the number of investors being an issue. But it really depends on scale... it is an issue if you are seeking a small round in the future and have hundreds of investors. Because to resolve everything legally costs a lot of time and money. But if the round is large, then it's less of an issue anyway as mountains can be moved for large rounds (it's not ideal, but it can be done). Seedrs is appealing because this approach doesn't preclude choices in the future. I don't know if there is a North American equivalent to what Seedrs have done, to have a single shareholder structure in a friendly format, but it's the way to go if you choose to issue equity for funding.

by rexreed 14y ago

wisty 14y ago

I think the JOBS act allows bonds, as well as equity.

rexreed 14y ago
I would imagine that if this was the case, the investors would want it to be treated like convertible debt. After all, who wants to invest in a highly risky project where the odds of losing all your money are near 100% to only be rewarded by a long-term debt payoff with interest in the single digits?

jrkelly 14y ago

FWIW, I think AngelList is already planning to do that bundling via SecondMarket with their crowd-funding offering: https://angel.co/help/invest#invest-3 https://angel.co/help/invest#invest-3 Q: Do startups have to deal with a million new investors? No. The overhead is the same as adding a single large investor to the round. All of the investors are pooled into a single fund which, in turn, invests in the startup. Only the fund is listed on the company's cap table—the individual investors are not. The fund also signs the investment documents, the individual investors do not.

rexreed 14y ago
This is the right approach, I believe. However, it has not yet been tested in the courts if an investor in the pool sues when he/she feel wronged when a future investor tries to cram down all these investors in a down round. It's inevitable to happen at some point, and it will probably be an issue given that most investors in the crowdfunding approach will be unaccredited investors. Right now as it stands, Second Market is only available to accredited investors (https://angel.co/help/invest#secondmarket https://angel.co/help/invest#secondmarket) and so the JOBS act crowdfunding rules don't apply here in the same way.

buro9 14y ago

In the UK I used http://www.seedrs.com/ http://www.seedrs.com/ to raise GBP 50,000 (in about 15 hours) for my startup http://microco.sm/ http://microco.sm/ One of the big reasons that I chose to use Seedrs, beyond being FSA approved, was that they become a single shareholder that I deal with. That is how they are in the terms and how I issued the shares. They hold all of the investor details (some 60 individuals who are already users of another site I run - my users are my investors) and have structured it so that the investors are buying the equity through Seedrs and Seedrs hold a record of that amount in their name. Effectively, Seedrs are a single proxy, but I never have to care about having more than 1 shareholder from a legal perspective (I do care, I speak to my investors, but that's a human angle rather than legal/accounting). I spoke to a few VCs first who voiced concern about the number of investors being an issue. But it really depends on scale... it is an issue if you are seeking a small round in the future and have hundreds of investors. Because to resolve everything legally costs a lot of time and money. But if the round is large, then it's less of an issue anyway as mountains can be moved for large rounds (it's not ideal, but it can be done). Seedrs is appealing because this approach doesn't preclude choices in the future. I don't know if there is a North American equivalent to what Seedrs have done, to have a single shareholder structure in a friendly format, but it's the way to go if you choose to issue equity for funding.