Y Combinator, a well-known tech accelerator, created the SAFE (simple agreement for future equity) in 2013, and uses it to fund most of the seed-stage startups that participate in its three-month development sessions. With an emphasis on simple, this new equity security works for seed-stage startups.
The SAFE is like a warrant entitling investors to shares in the company, typically preferred stock, if and when there is a future liquidity event, i.e., if and when the company next raises “priced” equity capital, or is acquired, or files an IPO. Like convertible debt, SAFE deal terms can include valuation caps and share-price discounts, to give early (CF) investors a lower price per share than later (VC) investors or acquirers get for the same equity.
When “true” equity crowdfunding launched on May 16, 2016, Wefunder led the new asset class with 10 Title III offerings. Within a few days it added 11 more offerings. No other funding portal that I know of has half as many Title III offerings as Wefunder.
If you want to exercise your new right to invest in innovative startups and growing small businesses, where will you start — which funding portals will you visit to find the best offerings of private securities? For many people who have little or no experience evaluating angel investment opportunities, the best place to start is a website like Stratifund.
Many of the companies that sell securities via Title III crowdfunding portals, at least in the first year or two, will be early-stage startups with little or no history of profit or even positive cash flow.
“In many cases, issuers can avoid thorny disagreements over valuation by offering hybrid securities known as convertible notes to crowdfunding investors”…
In this article I profile a pioneer in the securities crowdfunding world: 99Funding, a broker-dealer-affiliated funding platform that currently features Regulation D offerings (for accredited investors only) and plans to introduce Title III offerings this month.
The aspect of the JOBS Act that has the potential to touch the largest number of Americans is Title III (“the crowdfunding exemption”).
Do you need to know about equity crowdfunding? If you are a typical reader of The Corporate Counselor, the answer is yes, but only in connection with the potential future acquisition of, or investment in, a company that raised money by equity crowdfunding.
There are important distinctions between funding portals and broker-dealer platforms. Funding portals are a new type of intermediary created by Title III of the JOBS Act, while broker-dealers have been established market makers for many decades. A broker-dealer can be an individual or a company.
The potential rewards of angel investing are not just financial, though. There are also strategic benefits, which may include:
Crowdfunding, or crowdfinancing, is a method of collecting many small contributions, by means of an online funding platform, to finance or capitalize a popular enterprise. As crowdfunding is so new, there is much confusion in the marketplace about it—for example, many people still think of Kickstarter as the epitome of crowdfunding.