Startup Crowd Funding Models Explained

Crowdfunding is a common method for startups and businesses looking to raise funds to scale their venture. It can also be beneficial in cultivating a community of investors and potential clients, particularly during the growth stages of your startup. Crowdfunding usually takes place on crowdfunding websites which facilitate the interaction between fundraisers and the ‘crowd’.   

There are a number of crowdfunding models which provide varying benefits and pitfalls for startups. As well as consulting a commercial lawyer, we recommend conducting research to find the best option for your startup. With numerous options to choose from, we have narrowed them down into three beneficial models for your startup to consider:

Equity Crowdfunding

The equity crowdfunding model is suitable for small to medium sized startups seeking capital to scale the business. Using the equity crowdfunding model founders trade shares in their startup for donations. The percentage of shares can vary depending on the startup and the number of potential investors, which within the model can be extensive. There is a strict legal regime around equity crowdfunding, so it is important that you consult a commercial lawyer before commencing any equity based capital raise.

Donation Based 

The donation based crowdfunding model is typically employed for charitable projects where a startup asks a crowd to donate funds in exchange for non-monetary rewards. This method is geared toward innovative small startups rather than for-profit business startups. Founders using donation based crowdfunding raise capital using avenues such as social media to amplify awareness and encourage donations.

Debt Crowdfunding

Debt crowdfunding, also known as ‘peer-to-peer lending’ and ‘crowdlending’, operates by collecting donations with the promise of repayment. This method can be appealing to founders who are unwilling to give out equity, preferring to re-pay the funds. As a founder, it is essential to clearly outline your terms as investors may expect to return dividends or interest. It is crucial that you Procure advice from a commercial lawyer before proceeding, to ensure that you are compliant with your legal obligations.  

Crowdfunding can be a quick and innovative source of capital, however it can also be risky for startup founders. Founders should therefore conduct their due diligence and consult a commercial lawyer before proceedings with a raise.  

Need Help?  Contact Us 

At Allied Legal our team of commercial lawyers can assist you in navigating the often-complex crowdfunding landscape. We can guide you through the regulations, obligations and procedures your startup must meet when considering crowdfunding. If you want to learn more about how our team of commercial lawyers can help, give us a call on 03 8691 3111 or send us an email at hello@alliedlegal.com.au. 

You might also like our article Leveraging Your Startup’s Competitive Advantage.