What is Equity Crowdfunding and How Can It Benefit Your Business?

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You're an enterprising startup owner. And that means you know the importance of raising funds for your business.

But if you want to find investors, you first need to know what your investment options are.

Here, we're answering the question, "what is equity crowdfunding?" to help you decide if this is the right financial choice for your startup.

What is Equity Crowdfunding?

First, let's cover the essentials: what is equity crowdfunding?

Crowdfunding is the lovechild of microfinancing and crowdsourcing. It works by bringing people who want to fund companies to companies that need funding. It's sort of like Kickstarter and Indiegogo...but for companies trying to raise capital.

However, unlike your typical big-money investor, crowdfunding campaigns typically involve a large number of investors giving small amounts of money to a company.

Equity crowdfunding is a subset of crowdfunding sometimes called investment crowdfunding. It allows individuals to invest in an early-stage company that isn't yet on the stock market in exchange for equity (stocks, or a percentage of ownership) in the company.

Not only does this help your company raise capital; it also comes with a few key benefits.

Benefits of Crowdfunding

Aside from raising capital, the single biggest benefit of crowdfunding is minimizing risk.

As a business owner, you know the ongoing risk of equity: when you get large investors, they buy larger shares in your company, which means more say in what your company does. Crowdfunding eliminates this problem since you get a large pool of investors who invest at lower levels.

The large pool of investors also means that you have a large pool of people willing to give your company feedback on what you're doing right and how you can improve, which is a huge help in the early stages of a venture.

Where Equity Crowdfunding Fits With the Rest

There are several different types of crowdfunding out there, including rewards-based crowdfunding and peer-to-peer lending. Of all the types of crowdfunding, equity crowdfunding makes up the smallest slice of the pie.

That does not, however, mean that equity crowdfunding should be ignored. In fact, it offers a key benefit that other types of crowdfunding often lack.

It gives investors a real ownership stake in the success of the company they're investing in, however small that stake may be.

This goes a long way to ensuring that your investors will stay loyal. They have a real stake in the company, which means that even if they only gave a small amount, they're more likely to want to see your company succeed.

Angel Investors to Help Your Business Soar

Now that you know the answer to the question, "what is equity crowdfunding?" you're ready to use it for the betterment of your business.

If you need more tips on how to make equity crowdfunding work, check out our blog for more ideas. Check out these six tips for successful equity crowdfunding or this post on the basics of a successful equity crowdfunding site.

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