Equity crowdfunding is an online fundraising process where emerging start-up companies can raise capital from many small investors. In return for providing the necessary funds, the small investors get an equivalent portion of the corporations’ equity shares. These equity shares entitle them to become partial owners of start-up companies. They can then participate in the decision-making process at the annual general meetings, appoint directors and get a share of after-tax profits. However, these corporate enterprises should not list their shares on any stock exchange, especially in the early stages of their formation. Conversely, they have to incur losses equivalent to their equity shareholding on the companies’bankruptcy.
Kavan Choksi – Reason for the popularity of equity crowdfunding among start-up companies
Kavan Choksi is a well-known businessman with expertise in business finance, equities, and investments. According to him, entrepreneurs operating start-up companies have a difficult time promoting their businesses to institutional lenders and high net-worth investors. These financiers include commercial banks, credit unions, venture capitalists, and angel investors. The entrepreneursmight have viableprofit-generating business ideas.However,they often face an uphill task trying to convince the financiers. Even if the entrepreneurs are successful in their efforts, there is no guarantee they will have the necessary funds.They prefer to open a business profileon popular equity crowdfunding sites in such a scenario.
How can businesses raise capital via equity crowdfunding platforms?
Popular equity crowdfunding platforms on the Internet have democratized the process of raising capital from small investors for start-up entrepreneurs. They can now approach a large online audience of small prospectiveinvestors to fund the implementation of their business ideas. In exchange for receiving necessary capital, the entrepreneurs should be willing to give these investors a portion of the equity in their businesses.However, it is a small price for them to pay to get the capital they need to run their companies smoothly. It implies having to forgo absolute ownership in the decision-making process of their companies.
Entrepreneurs of start-up companies need to register their businesses on popular equity crowdfunding platforms on the Internet.The process involves creating a viable profile for their companies where they have to:
- Promulgate their business mission, vision, and long-term strategic goals to impress the investors,
- Convince the investors of the potential profit-generating capacity of their business ideas, and
- Disclose all the necessary financial statements and reports online for the investors to scrutinize.
If the start-up entrepreneurs are successful in their fundraising effects, they can expect the onlineinvestors to provide the necessary capital. However, they should beaware of the charges payable to the vendors managing the online equity crowdfunding platforms on the Internet. The costs will be equivalent to a certain percentage of capital they raise from the small online investors.
According to Kavan Choksi, equity crowdfunding platforms enable start-up companies to raise capital from numerous small investors. The fundraising process allows themtopromote their corporations to a large audience forge business connection with potential customers and investors. Moreover,to obtain the necessary funds for their companies, the entrepreneurs do not have to make loan repayments or undergo business creditability checks.