Crowdfunding: The answer to the eternal question of the Underpants Gnomes

The answer to the eternal question of the Underpants Gnomes is …. drum roll please…. Crowdfunding! Imagine this: it’s 3:00am. You have an idea.  Oddly, you remember it at 7:00am when your alarm rings. Amazingly you still remember it at 6:30pm when you get home. You rush to your computer and describe your idea. You offer people a chance to invest in your idea for as little as $100.00.  Overnight you raise $1,000,000.  You go in to work and quit your job.

Crowdfunding

  That’s often the vision of crowdfunding.  But slow down, buckaroo, it’s not that easy.   Crowdfunding has two main categories: reward and equity.
  Reward based crowdfunding means people on the internet can “buy” a reward, like perhaps a change to attend an opening of a show, or get a first edition of a product. Once you get your reward, you have no further interest in the company – you don’t own any part of it.   Equity based crowdfunding means you are buying a “security” which is often a direct, if minuscule, ownership interest — the most common being stock. But you could also get a bond, or a note or a “membership unit.”   Equity based crowdfunding is a highly regulated process. You may have heard it that it is easier and cheaper than traditional investment paths – but that doesn’t mean it’s easy or cheap.  There are still many many regulations with which you must comply.  And at the end of the day – you have people who’ve paid to be part of your company. It can be like inviting a very large number of in-laws into your home. They can be very intrusive.   On the other hand, if well conducted, a crowdfunding campaign can be a much needed infusion of early capital into a company.  

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