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Preparing Your Business for Equity Crowdfunding

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Preparing Your Business for Equity Crowdfunding

By Startup Valley (381 words)
Posted in Equity Crowdfunding on June 27, 2013

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What Is Equity Crowdfunding?

It is crucial that your business is aware of the difference between a donation, reward, and equity crowdfunding. Donation based is simply a gift which does not need to be repaid. Rewards based crowdfunding allows you to accept money in exchange for offering a gift or reward based on different investment levels. Often times, that reward is a copy of the product that your company created. However, equity crowdfunding allows startups to offer shared equity in their company to a group of investors. These investors will in turn retain a share of equity in your company for that investment.

How Much Equity Will You Concede?

Determining how large of a stake you will offer to new investors is completely up to you. Generally, offering a relatively smaller portion of equity will allow you to retain overall control of your company. It is important to keep in mind that your business structure will also determine how much equity you give out to investors. For example, an s-corporation can only have 100 shareholders with one class of stock. Therefore, you may need to look into the LLC structure or the c-corporation structure if you want to have a larger amount of investors backing your venture.

Consider the Tax Implications

Whenever money changes hands, there are usually tax consequences that go with that exchange. You should always have a tax attorney or accountant review the potential tax impact that offering equity to investors will create for your business.

The JOBS Act

Recent delays have caused the JOBS Act to stay in a state of limbo for the moment. This presents a challenge for companies that are attempting to gain investors to stay on board until they are able to fund their campaign. Constant communication with potential investors, sharing your pitch, attending events and raising awareness are all key factors to success. Equity crowdfunding will be viewed as a powerful tool which can help make your dream a reality. In the near future, entrepreneurs can leverage “the crowd” in order to receive necessary startup funds to launch their businesses.

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