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Thursday, January 8, 2015

Crowdfunding Basics: Internet-Based Business Funding Solutions

By: Peter J. Lamont, Esq.

Crowdfunding can be a highly effective means of building capital for your business, service or product. However, in order to make it work for you it is important to understand what it is and which variation of crowdfunding might work best for your company or venture. 

Crowdfunding is basically the process of raising money from  2 or more people, usually via the Internet. Some of the most popular crowdfunding websites include Go Fund Me, Indiegogo, Kickstarter, Teespring and You Caring.

In general, there are 4 primary types of crowdfunding. It is important to know which type of crowdfunding will best suit your needs. The 4 types are:
  1. Equity Funding
  2. Donation Based Funding
  3. Reward Based Funding
  4. Debt Funding 
Equity Funding: in this model the borrower provides shares of stock to the investors. As the title suggests, you give up equity in exchange for the investment. You can expect equity investors to engage in a formal due diligence period before deciding to invest in you, your company and/or product.

Donation Based Funding: This is perhaps the model most familiar to entrepreneurs. Websites like Kickstarter are donation based funding sites. Under this model the investors do not expect anything in return for their investment (i.e. no stock, product etc.)  It is essentially "good-will" funding. 

Reward Based Funding: This model is similar to donation based funding but in reward based crowdfunding the investors are given a reward for their investments. In essence, in return for investing, backers receive different rewards based upon the amount of funding they commit (defined by the business or entrepreneur behind the project.)  In general, donation based and reward based funding models work best with creative, artistic, product based and/or tech projects or companies. 

Debt Funding: Debt funding is where lenders are able to provide financing and the lender receives a debt instrument that pays interest return. With debt funding the investor has a secured interest in the company (namely a debt instrument of some type) where the goal is to loan  money to the company with a fixed repayment term requiring a specified interest rate during the term of the loan. Examples of debt based funding website include: Prosper, Funding Circle, and LendingClub.

If you would like more information about this topic or have general legal questions, please feel free to contact me at (973)949-3770 or via email at plamont@peterlamontesq.com Offices in: New Jersey New York, Colorado & Puerto Rico and affiliated offices throughout the country.

© 2010-2015, Law Offices of Peter J. Lamont & Associates. This Update is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between the firm and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. This Update may be considered attorney advertising in some states. Furthermore, prior results do not guarantee a similar outcome.
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