An equity crowdfunding platform could be just the thing your start-up needs to make a big splash in your niche industry. It could also be what your money needs to grow and prosper so that you see increases in your net wealth. Before you get started down the path of an equity crowdfunding platform, however, there are some things you’ll want to research before the journey begins. That way you’ll have a better idea of what to expect in terms of total success.
1. Who Is Leading The Crowdfunding Platform?
Equity crowdfunding platforms are generally run by entrepreneurs or by investors. If it is entrepreneur-based, then the terms of the investment, including the share price and the amount of equity an investor receives, will already be dictated. On the other hand, an investor-based platform will negotiate the terms of an investment so that investors can get better deals beyond the initial pitch.
2. How Much Dilution Will There Be?
Sometimes the shares on offer from an equity crowdfunding platform can come with what are called “preemption rights.” This means that an investor won’t have their share of the business diluted simply because a business holds multiple funding rounds on the platform. If there are no preemption rights, then it is possible to not get any return on an investment, even though others are getting filthy rich. This happens because a company can dilute the market with their own shares that they buy back themselves. Secure your preemption rights or expect trouble.
3. Has Any Due Diligence Been Performed?
The problem with most equity crowdfunding platform propositions is that they are basically just a sales pitch. There has been no independent investigation of the claims that a company has made or if it has been done, it is hidden away and not shared to limit potential liabilities. Before any investment, it is important to do your own due diligence, even if a third party has completed an investigation that has been published. It’s always smarter to know personally where and what your money will be doing.
4. Do You Get Direct Ownership?
Some equity crowdfunding platforms own the shares that are raised on the behalf of the investors, which means they operate on a nominee structure. This is easier from a business perspective because it makes managing large numbers of investors an easier process. Direct ownership benefits the investor, however, because it provides a higher level of protection against venture capitalism.
5. Is The Equity Platform Regulator Authorized?
If there is no oversight over the equity crowdfunding platform is operating, then there is no control over how the money is flowing internally. There could be a chance that your investment never even makes it to the company itself. Regulation also means your information is kept secure during the transaction so that you can eventually profit from it.
By keeping these 5 things in mind, you can help to change your own future while changing the futures of others as well. That makes it a viable investment, but only if you’ve done your research first.