How equity crowdfunding works

You might have heard of an increasingly popular funding method for startups: equity crowdfunding. It’s a fantastic tool to raise investment from your fans and building a fleet of brand ambassadors. Here’s a step by step guide to how equity crowdfunding works.

Prepare your investment summary

The first step is to prepare a brief summary of your round. At this early stage it’s not worth obsessing over building the perfect full pitch deck. Focus instead on a one-pager document with the key information: contact information, about the round (valuation of your company, target for this round, if you’re SEIS/EIS eligible…), traction, use of the money, the customer problem, your solution, the market, your competitive advantage, your team, your business model and topline financial projections (4 to 7 years). 

This will be enough for the next few steps. Limiting yourself to a one-pager will also help you focus on your more important messages and communicate your offering succinctly. Refine this document before you work on other aspects like your video or your content on the platform.

Apply for SEIS/EIS

Being SEIS/EIS eligible is crucial for some investors. The earlier you apply for Advance Assurance the better. Advance Assurance is proof from HMRC that your investment qualifies for the scheme and that investors will get a tax break by investing in you. It’s important to get your application right the first time around, as it takes a few weeks. SeedLegals is the fastest, most reliable way to get approved (97% of applications done through SeedLegals get approved, versus the industry standard of 62%). 

Find a lead investor

This step is important, especially if you don’t have a big crowd to rely on. If you already have investors in your company, they might be willing to lead the crowd round. If you don’t have a lead investor yet, research the business angels investing in your industry and company stage (Crunchbase and AngelList are great tools for this). If you’re lucky, this could be someone in your wider network. If not, look for an introduction from someone you know. Share your investment summary with potential lead investors, asking for advice and look to build a relationship, rather than asking for investment outright. 

Get accepted by one of the platforms

Contact your platforms of choice. Here are the top 7 crowdfunding platforms to choose from. Present them your investment opportunity and ask all of the questions you might have at this point. One of the inevitable questions by the platform team will be what percentage you’ve secured already, hence the importance of having a lead investor.

Create your video, pitch on the platform and pitch deck

Once you’ve chosen your platform, start working on a catchy video, your public texts on the platform and a pitch deck which will be available by request once you go live. If you wish to offer more information, you can also prepare detailed financial projections to share with potential investors.

Identify and warm up your crowd

Perhaps the most crucial and overlooked step. The investors on the platform will not lead your round. They will invest along with your crowd. It’s crucial that you lead on identifying, engaging and keeping your circles informed. Think broadly: The 3Fs (friends, family and fools), ex-employers, ex-colleagues, social media followers, suppliers, partners, business angels…

Your best bet is your clients: if they use and love your product or service they will want to be part of your journey. And not only that, after becoming investors, their level of engagement will jump up, as hard data from FinTech companies show.

Here are 21 ways to promote your campaign to your audience to help you reach your target.

Build a simple investor CRM or spreadsheet to capture who’s shown interest and how much they would like to invest. This will help you time your launch. The platform will not let you go public live until you have at least 20-30% secured, but I would recommend a much higher figure: at least 60% from 50-100 investors, so you can show social proof.

Pass the platform’s due diligence process

Being an FCA regulated company, your crowdfunding platform of choice will want to make sure that your pitch is ‘fair, clear and not misleading’. Therefore they will ask evidence for any claim you make on your public pitch materials (video and publicly visible content). Therefore, if you say you have an MBA at Harvard or that you’re market leader in your category, prepare to produce physical evidence of it (and no, your CV or LinkedIn profile is not enough). Allow at least two weeks for the process.

Launch in private

Once you’ve passed the due diligence, it’s time to go live. At this point, the pitch will only be available ‘by invitation’. Ask your lead investors and your crowd to do it now. Remember, you’ll only be able to go public when you reach 20-30% of your target!

Launch in public

It’s time now to show your round to the world. Even with the most attractive product or business model, the slickest video and copy and all the bells and whistles, if you don’t promote your crowdfunding campaign, it’s unlikely that you will get funded.

Once investors start to roll in, respond to document requests and any questions on your pitch discussion board promptly. Use the platform update features to keep your followers engaged. Try to reach 100% of your objective ASAP (and go into over-funding mode), as a funded company is really attractive and people sitting on the fence will be more likely to jump in when there is powerful social proof.

Formalise the investment

To avoid having a chaotic cap table, equity crowdfunding platforms offer a nominee structure. They hold the shares on behalf of the smaller investors. If you reach your objective (and after a cooling-off period) the money will be collected by the platform. Once you formalise the investment round, the money will be transferred to your account. 

Wrapping it up

The process of doing an equity crowdfunding round shouldn’t be too complicated if you follow the steps in this article. 

Be ready to spend time on the crucial, but often overlooked steps such as building and warming up your crowd, and engaging with people who ask questions on your crowdfunding page. At the end of the process, you will have not only the money you need to execute your business plan but also a legion of investor ambassadors that will spread the word about your product and service for years to come.