Ever wondered what equity crowdfunding was? Well, we’re going to explain what it is, exactly how it works, and what the benefits of crowdfunding are.
What is Equity Crowdfunding?
Equity crowdfunding is a process where startup, early, and growth-stage companies raise money from the public in exchange for a slice of equity in the business. This means that for the investor, they can become shareholders in the company, even if the company is not listed on the stock market.
Raising through crowdfunding is in comparison to other methods where companies may raise funds by borrowing from friends, asking the bank for a loan, or using angel investors and venture capital firms.
The amount of money raised through equity crowdfunding could be anywhere from £50,000 to as much as £7m. Equity crowdfunds are then normally conducted through online forums, across social media, and on crowdfunding websites like Crowdcube.
Equity crowdfunding gives the everyday investor the opportunity to own part of a company they love. This lets them help grow a business that they’ve supported and enjoyed over the years.
How Does It Work?
When you invest via equity crowdfunding, you purchase shares in the company. In most cases, anyone looking to invest can start with as little as £10.
If the company you’ve invested in then experiences growth, the value of those shares might rise. If you decide to sell your shares, there is then an opportunity to profit from any increase in the value of your shares.
For example, company X has decided to start crowdfunding. They price their shares at £10 per share, so you buy 10 shares for £100. If company X grows quickly over the next five years, (say the company’s value increases tenfold) the 10 shares you bought would now be worth £1,000.
What Are The Benefits Of Crowdfunding?
One of the biggest benefits of investing in an equity crowdfunding campaign is that they often come with a greater degree of satisfaction. This is because the investor usually picks a business or idea that resonates with them. They might like the company’s mission, they might already use the product, or they might just want to invest because they believe in the team behind it.
Companies know that this is why a lot of investors will choose to participate in a crowdfunding round. They’ll often treat their crowdfunding investors to special investor rewards. This could be anything from merchandise, like branded tees, hoodies, and water bottles. To special product features, promotions, and company insights. Again, these can act as a great perk if you’re investing in a brand you love.
Equity crowdfunding also means that you’re putting your money into small or medium-sized businesses, instead of huge multinational companies. If you’re all about helping out the underdogs, then this is a huge benefit to crowdfunding.
Another benefit of investing through crowdfunding is that you can invest from as little as £10. If you’re just getting to grips with the idea of investing, this is a nice way to test the water while showing your support for a company that you love.
Enterprise Investment Scheme:
If you’re considering investing a lot more than £10, then another benefit is that the UK government offers extremely generous tax reliefs when investing in equity crowdfunds. This comes in the form of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These schemes help younger, potentially riskier businesses raise money by offering tax relief to investors. This makes the investment more appealing to investors. For example, the EIS grants 30% of whatever the investor pays for shares as a credit that then reduces the investor’s income tax owed for the year.
Are There Any Risks?
As with all investments, there is a certain level of risk involved.
If you invest in a company that doesn’t perform well, there is the possibility that you’ll get back less than you invested. Some types of crowdfunding investments also regulate when you can buy and sell shares. This could mean that you don’t receive dividends on your investments for a number of years.
There is also the possibility that the business you invest in needs to top up their capital by crowdfunding again. If this happens, the percentage of equity held by early investors dilutes, unless they decide to invest again.
Equity crowdfunding is a great way for everyday investors to purchase shares in a company that they believe in. You don’t need a huge amount of money to get involved with equity crowdfunding, and you have the added satisfaction of watching a small business thrive and grow.
For more information about crowdfunding, head to the Emma Community where we’ve been discussing this in more detail.
Have you ever considered investing in Emma…? Join the conversation on the Emma Community and let us know your thoughts!
*As with all investments, equity crowdfunding comes with risks that all investors should be aware of . Remember, your capital is at risk.