Crowdfund Your Business to Success

Crowdfunding has quickly become a mainstream fundraising model for start-up companies and established businesses that need to raise capital. According to the Crowdfunding Industry Report by Massolutions, in 2014 there was $16.2 billion raised through crowdfunding platforms, a 167% increase over the $6.1 billion raised in 2013.

Two popular types of crowdfunding currently exist – equity and reward based crowdfunding. Equity crowdfunding allows investors to contribute cash or other assets for an ownership interest in the company. Under this method, the accounting and tax effects are usually straightforward as it is an increase to capital, but the legal issues can be troublesome because of the regulations from the Securities and Exchange Commission.

Reward based crowdfunding, however, is essentially a product pre-sale to future customers. The interested parties are providing the money up front based on the idea or prototype but will eventually receive a benefit in the future. Thus, it is important to consider the timing of the campaign. If a majority of the money is received towards the end of the calendar year with no matching expenses, it can create an unnecessary tax liability for a company already short on funding.

In either situation, it is important that the company is prepared and has addressed these issues with an attorney and accountant.

Other considerations under each include:

  • Research – does the idea or product have any appeal to potential customers? Even though it may be innovative, will someone ultimately pay for it
  • Presentation – do you have a video or presentation that answers all of the key questions about the product to appeal to potential customers (reward based) or investors (equity)?
  • Resources – can you leverage any services from family or friends?
  • Awareness – once the campaign goes live is there adequate “buzz” about the product. In addition to family and friends, many successful campaigns also introduce their product or idea to bloggers that have a much larger following.

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