Crowdfunding for Startups: Your Options Explained

Crowdfunding for Startups: Your Options Explained

Funding a start-up or small business is one of an entrepreneur’s greatest challenges. Thanks to the success stories connected with platforms like Kickstarter and GoFundMe, crowdfunding has become a popular alternative to hunting down loans and angel investors. However, while there are many benefits to crowdfunding, it requires more effort than simply creating a webpage and watching as donations pour in. Different kinds of crowdfunding will work best for different kinds of businesses. The three major kinds of crowdfunding for startups are:

Donation-Based

First, we’ll look at donation-based crowdfunding. This is what springs to mind when most people think about crowdfunding for startups. In this model, investors or contributors make donations with no expectation of getting anything in return, financial or otherwise. This method is best for philanthropic or charitable missions, like raising money for disaster relief or to help the uninsured to pay for their medical bills.

Rewards-Based

While the donation-based model is driven by generosity, reward-based crowdfunding for startups encourages contributions by offering rewards in exchange for funds. Some campaigns will offer different reward “tiers” depending on the amount contributed. These rewards are not considered financial returns, as is the case in equity-based crowdfunding.

Equity-Based

Equity-based crowdfunding for startups is similar to traditional financing methods in that its contributors receive ownership in the company for their funds. This entitles them to financial returns on their investment. Returns can come in the form of a share of the profits by way of dividends or distributions. Equity-based crowdfunding is best for larger campaigns seeking to make upwards of $50,000.00. However, this method is open only to accredited investors, whereas donation-and-rewards-based crowdfunding are open to the general public. Ultimately, the best method of crowdfunding for start ups depends on the business itself.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling (727) 279-5037.