Crowdfunding a new business idea through Kickstarter and similar sites has helped a lot of new companies get off the ground. However, they aren’t without pitfalls.
Before you decide to crowdfund your newest entrepreneurial dream, it’s smart to spend some time investigating how it works. There are three basic types of crowdfunding ventures:
- Rewards-based crowdfunding: You ask for financial support from people in exchange for some reward. For example, if you’re developing a new collectible card game, you may promise a deluxe edition with a special box for early investors who donate $100 or more for your project.
- Debt crowdfunding: There are several types of debt crowdfunding platforms available, including peer-to-peer lending. These are essentially micro-loans that ultimately have to be repaid (usually with interest).
- Equity crowdfunding: These are the most complicated types of crowdfunding ventures. You exchange a small part of ownership, or equity, in your business for the financial capital you need to get it off the ground.
Contract liability can be an issue with crowdfunding ventures — especially when you promise your contributors a reward. If the development stalls or you’re unable to produce anything despite your efforts, you may not be able to fulfill your end of the bargain. Similarly, you may run into trouble repaying microloans if the product doesn’t launch as well as you hoped. And, naturally, equity crowdfunding falls under the purview of the Securities and Exchange Commission (SEC). Those ventures usually come with registration requirements and other legal compliance issues.
If you’re thinking about using crowdfunding as a source of support for your business goals, find out how an experienced business law attorney can help you avoid trouble down the line.