Harper Macleod is a leading independent Scottish law firm. Our lawyers work closely with businesses at every stage of their life-cycle, from inception right through to a successful exit. We have extensive experience of helping young, innovative companies secure the necessary investment to fuel their growth into strong, successful businesses.
Crowdfunding: How Can It Help You?
Initially, crowdfunding has been seen as a way for small businesses to obtain finance to fill the gap that the banks had left following the financial sector crash in 2008. Although still used for this purpose and very much a popular way for startups to obtain finance, it is now being used by larger and larger organisations with various multi million pound deals having taken place in 2014. Even large organisations are starting to realise that not only is crowdfunding a way to obtain finance but also a way to get ambassadors for their brand. The UK alternative finance market said to be worth over £4.4 billion by the end of 2015 and is showing no signs of slowing down.
Types Of Crowdfunding
Broadly speaking there are four main types of crowdfunding;
- Equity In return for an investment, the investor is offered shares in the company which is raising money;
- Peer 2 peer lending: A loan that is brokered between a borrower and a crowd of lenders. P2P is the fastest growing form of crowdfunding;
- Donation: The crowd contributes funds to finance a project for nothing in return;
- Reward: In return for a contribution, a funder redeems a reward. Typically this means pre-selling a product or service i.e. a t-shirt, a CD or a meet and greet with the founders.
- There are a plethora or crowdfunding platforms operating different models and it is vital that a company chooses the form of crowdfunding platform which suits their business needs.
- Choice of platform can also be particularly important when it comes to peer to peer and equity crowdfunding. With the varying peer to peer platforms operating interest charges differently and equity platforms offering differing chare structures, choosing a structure which will fit with the business plan and will not prohibit the business going forward is vital.
- The different platforms will charge different fees for crowdfunding campaigns and this might be a percentage of the amount received by the company through the campaign, or a flat fee e.g. legal fees. In addition, different equity sites have different legal structures so it is vital that you take advice as regards the different platforms and the impact these could have on your business.
- Another important consideration with the platform id the contribution they make to the outcome of the crowd fund. A platform with a good track record and a large member base will be able to leverage their network which should help attracting investment.
Running The Campaign
One of the key aspects to a successful crowdfund campaign is gathering momentum at the launch by having different investors lined up to invest immediately e.g. family and friends. This will then spike interest by other potential investors and hopefully encourage more to invest. A crowdfunding campaign involves a lot of work and it is therefore important to ensure that as many people as possible are pushing the campaign forward at every opportunity.
Can My Business Crowdfund?
In theory, any business can use crowdfunding as a means to raise finance. However, in practice crowdfunding is not for everyone and businesses should ensure that they explore all avenues of funding to ascertain what works best for them. Provided crowdfunding is structured correctly it can be a fantastic way not only to raise funds in a challenging climate but also to generate PR and create knowledge about their product and an increased awareness of your product or service.
Harper Macleod are Scotland’s leading legal crowdfunding advisers advising both crowdfunding platforms and companies looking to raise funds.