On Equity Crowdfunding

In the environment of tight credit that characterizes the global economy’s tepid recovery from the Great Recession, many entrepreneurs are turning to unconventional sources of startup financing. Equity crowdfunding, mediated through registered online funding portals, is one of the available alternatives.

In order to ascertain whether EC would be right for you, there is some basic information you need to know.

 

What is equity crowdfunding, and how does it differ from standard crowdfunding?

Unlike standard crowdfunding, EC involves more than simply donating money to a cause in exchange for rewards, perks, or goodwill—instead, equity crowdfunders acquire an ownership stake in the company-to-be.

EC differs from traditional equity financing in its potential to attract numerous prospective investors offering modest quantities of capital. Conventional equity financing, by contrast, often involves a small number of deep-pocketed investors capable of advancing large sums.

Advantages

•   Democratization (sort of): EC can foster investment opportunities for people of comparatively modest means. However, the rules governing EC (including accredited-investors-only restrictions) vary by jurisdiction, along with the required documentation. The situation is fluid, as governments learn more about a relatively novel investment tool and modify their regulatory frameworks accordingly. It’s a good idea for businesses and entrepreneurs uninitiated in EC to seek legal counsel, so as to ensure compliance with local securities regulations.

•   Breadth of investment pool: Not only can EC enable entrepreneurs and business owners to benefit from a broader pool of potential investors than might otherwise be available; the relationship is a two-way street. As EC expands and develops, small- and medium-scale investors will also have the opportunity to dedicate a portion of their savings to a vast array of endeavours that might otherwise have received little exposure.

•   You set the fundraising commitment. When businesses attempt to raise early funds through venture capital firms, they receive whatever those organizations are prepared to give—usually a small sum, unless you already run a thriving business with a steady revenue stream. EC, by contrast, offers entrepreneurs relative freedom to establish and adjust their own targets.

•   Your funders have a vested interest in the success of your startup. After all, the more profitable your venture, the more lucrative the returns for them. If you encourage equity funders to promote your business idea on social media and within their friend circle, they will likely be keen to oblige.

Drawbacks

•   Legal complexities: As noted above, the rules governing EC vary by jurisdiction. A lot of entrepreneurs just starting out in the business world may not be familiar with financial disclosure rules, licensing, comprehensive business plans, and other requirements, and will need to undertake a lot of advance research and due diligence.

•   Small- and medium-scale investors may lack business and investment experience. Sometimes it helps to be able to defer to the advice of an experienced angel investor, venture capitalist, or business professional, especially when it comes to dealing with adversity and managing the expectations of your funders. In particular, new investors may not fully appreciate the risks associated with online and startup investments.

•   Some of your funders may be people you’ve never met. Obviously, this entails issues of trust and fraud prevention, and there is a risk that disgruntled investors may try to litigate against you in an effort to recoup a portion of their losses if your business doesn’t pan out. This is another reason why seeking legal advice is a good idea.

To equity crowdfund, or not to equity crowdfund?

EC may not be suitable for startups that lack a strong social media following, or that don’t offer a product or service that is marketable and compelling. For example, many of your Facebook friends may be interested in funding a bicycle store or a pet daycare; relatively few will be keen to support a more esoteric or specialized venture, like a business that designs refrigerator door hinges.

If you’re still interested in EC, I recommend this article in the Globe and Mail, by SeedsUp.ca founder Sandi Gilbert, as a basic guide to help you get started.

Equity crowdfunding portals, and useful links:

SeedsUp.ca—one of the first EC portals in Canada.

ncfacanada.org/equity-crowdfunding—a page devoted to EC, from the National Crowdfunding Association of Canada.

CloudFund.ca—another Canadian EC portal, in development at the time of this writing.

Alixe Cormick is a securities and small-business lawyer with expertise in Canadian EC regulations. She has penned an informative blog post on the subject, available here.

Mistakes To Avoid When Owning A Franchise

On many levels a franchise business can be considered a “turnkey” type of business. In other words, a lot of the important work has already been done in terms of establishing a brand and providing for quality assurance of selling a product or service. However, just because you are investing into a franchise doesn’t mean you’re guaranteed 100% success. To optimize your return on your franchise investment be aware of these common mistakes and try to avoid them at all costs:

1)      Not Reading the Fine Print:

A common mistake is when a new franchise owner doesn’t understand or even has knowledge about their responsibilities to the franchise and may learn the hard way. Before you sign on to any franchise business, understand that there has already been a team of lawyers who have gone through every detail pertaining to that business, protecting the interests of the parent company. They have outlined every step including your role as a franchise owner. There should be no doubt about what you’re buying into. Remember, it’s all spelled out in the contract - that’s why not only should you read the fine print but you should also go over every line of the contract with a qualified attorney.

2)      Not Talking With Current Franchise Owners:

Buying into a franchise means you are buying into a network of like-minded business owners. These are the perfect resources you should tap into as you get your business up and running. You’re all on the same team and it stands to reason that the success of one franchise is good for all the franchises. You’re sure to have many questions to ask but make sure you go beyond the potential franchise owner you might be buying from. Seek out other owners in your community to assess their experiences with operating the business and their relationship with the parent company.

3)      Not Having the Right Amount of Capital:

Any type of franchise business is a serious investment that goes beyond the initial purchase price. You also need to have enough capitol on hand to cover the pre-opening costs and other business budget items. Just as you need to have a cushion of several months worth of savings set aside for your family, you should also have enough capital on hand to insure you can survive any potential lean times with your new business.

4)      Not Researching the Neighborhood:

Suppose you are looking to invest in a franchise business selling hamburgers. You’ve got a great location and plenty of parking but what if the majority of your neighbors are vegetarians? That probably won’t happen but you can see by that example how important it is to research the community you’re going into with your franchise. You might have a robust business during the week but will be hard pressed for customers on a Sunday. You could also find out that there is a late-night crowd on the weekends which can provide a boost to the business. It all comes down to a question of doing the right research.

5)      Not Working With the Parent Company:

As a franchise owner you’ll have access to all information and benefits provided by the parent company. While it is true that the day-to-day operation will fall on your shoulders, that doesn’t mean you can’t tap into your field reps for help. Take full advantage of those company representatives; that’s what they are there for!