Crowdfunding for Beginners

Legal/ tax and helpful subjects

Characteristics of the different crowd financing methods

3 minute read

Companisto finances startups with the crowd – with you. A group of innovative lenders – our crowd – solves a problem many founders face: A special type of crowdfunding called equity-based crowdfunding closes the capital shortage many young companies face. We give companies the initial support needed for them to successfully implement their ideas. But what does the term (equity) crowdfunding mean?

Imagine the founders’ situation as following: The idea is good, the market is hungry, friends are ready to support, and a business plan is set up. But the bank or funding institution won’t give the approval needed for financing. This can happen for various reasons. For example, one may not be able to offer collateral, the model is not tested, or a market has not yet been established. In a few cases, equity capital suffices for the start; however, that is not usually the case.

This is where crowdfunding comes into play. Founders look for support among the so-called crowd. There are four different models of crowdfunding: donation-based or return-service-based crowdfunding, crowd lending, and equity crowdfunding. In all of these, one leans on a broad audience in order to enable financing in each respective form. Crowdfunding, crowd lending, and equity crowdfunding differ in essential points.

 

In donation-based crowdfunding, the crowd donates to a project over a certain period of time without getting anything for it. Return-service-based crowdfunding is similar; however, people receive a symbolic, i.e. non-monetary consideration for their donation, such as one of the financed CDs, a poster of the festival, or a band T-shirt. Return-service-based crowdfunding arose from the music, film and art scene and continues to be particularly popular there. For artists and developers, this type of crowdfunding is a good test for the market potential of their idea. The largest crowdfunding platforms are Indiegogo and Kickstarter.

 

Crowd lending describes the form of crowdfunding in which lenders are guaranteed to be repaid their invested sums. Another term for this form of crowd financing is lending-based crowdfunding. Whether or not crowd lending includes interest rates depends on the individual concepts and negotiations with the credit lenders. Ultimately, these are loans from private individuals via Internet platforms. Fundingcircle or Auxmoney are two of the well-known platforms that offer this type of crowdfunding.

 

The fourth version, which we run at Companisto, is called equity crowdfunding, or equity-based crowdfunding. Equity crowdfunding is a form of private venture capital. Investors can invest in projects, companies, real estate, or startups and receive participation in future profits and exits. In the event of a successful sale - called an exit - the Companists (as we call our investors) receive a percentage of the sale price. In the past, equity crowdfunding investments were also linked to company value participation. If the participation ended before the exit, a company valuation of the startup took place and the Companists received their share of the company by bank transfer in accordance with their participation quota. Since then, the contracts have been adjusted in such a way that we offer investors lifetime participation. Although this does away with the company value participation, the Companists can benefit from the profits and a possible sale of the startup for the rest of their lives.

 

 

Do you have questions about crowdfunding? Write us in the comments section below!


 


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Cristin Liekfeldt

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