For most startups, raising capital is one of the biggest hurdles to getting a business up and running. Thanks to new technology, funding is becoming more widely available, even for first-time founders.
Two popular methods for raising capital are equity crowdfunding and angel investments, and each method has both positive and negative characteristics. Read on to determine which option is right for you.
Overview of equity crowdfunding
You’re probably familiar with crowdfunding, thanks to popular sites like Kickstarter. However, equity crowdfunding is a bit different than launching a Kickstarter campaign.
With a traditional crowdfunding website, entrepreneurs raise money by accepting donations in return for some sort of perk, such as a free or discounted product.
With equity crowdfunding, the company raises capital by selling securities, such as equity in the company, revenue share and more. These investors aren’t just getting involved to earn free products and move on; they are interested in seeing the company grow and eventually make a profit.
Pros of equity crowdfunding
- Equity crowdfunding is usually easier than other methods of raising capital.
- As you raise money, you’re gaining attention and promoting your startup.
- Investors are more involved in the process and invested in seeing your company succeed.
- You’re in control of your company since you don’t have to make concessions to venture capitalists.
Cons of equity crowdfunding
- Equity crowdfunding is more complicated than it seems, especially since you’re dealing with multiple small shareholders.
- The SEC requires that you make your company’s financials available to every potential investor.
- Federal regulations limit startups to earning $1.07 million in equity crowdfunding every 12 months.
Only you can decide which is right for your company, but the answer might depend on how far along your business is.
Overview of angel investments
An angel investor is an accredited investor who has a high net worth and is willing to provide financial backing to promising startups. In exchange for the investment of capital, the angel investor receives equity in the company.
Angel investors often use their own money to fund the capital. Since these investments are often risky, this person will invest in multiple startups to maximize their potential returns.
However, most angel investors are interested in helping startups get through the difficult early stages of building a business. They aren’t solely concerned with what kind of profit they’ll receive. As a result, angel investors can be much easier to work with and provide more favorable terms than venture capitalists.
Pros of angel investments
- You can raise money privately, unlike equity crowdfunding.
- Angel investors usually provide more favorable terms than venture capitalists.
- You’ll gain access to experienced investors who may be able to leverage powerful connections.
- Angel investors can be valuable mentors and help you grow your business.
- There’s no limit to the amount of capital you can raise.
Cons of angel investments
- You will give away a certain amount of control over your business and may have to explain many of your business decisions to the investor.
- You will be under much more pressure to grow quickly.
- It can take much longer to receive funding, and you should expect to receive a lot of rejection.
Read more: [What Are the Typical Rounds of Raising Capital?]
Deciding which option is best
So now that you understand what goes into equity crowdfunding and angel investments, how do you know which is right for your company? Only you can decide this, but the answer might depend on how far along your business is.
If you’re in the very early stages of building your business and are still creating a prototype of your product, equity crowdfunding may be the best option for you. Crowdfunding can give you the momentum you need and help your business gain some exposure.
Once you have a stable base of customers, it may be time to look into Angel Investors. Angel investments can give you the capital you need to scale your business — just be sure you know what kind of equity you’re willing to give up.
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