Eager to start an Equity Crowdfunding campaign? Key Differences Between Equity, Debt and Revenue Offerings
Small businesses looking to acquire capital have many avenues to consider- from family and friends, to bank loans and angel investors, to a newly popular option: equity crowdfunding.
Equity crowdfunding has been rising in popularity as in many ways, it puts the control back in the hands of the small business owner. Small business owners can raise capital on their own terms and retain more control over their business. Especially in recent weeks when the need for funding is at an all-time high, equity crowdfunding can help small business owners receive capital fairly quickly from those who know and love what they do.
On Fundopolis, small businesses are able to offer equity, debt or revenue share securities, here’s the breakdown:
Equity: Equity represents an ownership in the business. Depending on the type of equity issued, the security may include voting rights, first right of refusal, or clawback rights. Offering equity is a great way to raise money quickly without needing to pay that money back. However, business owners need to be comfortable relinquishing some control and ownership of their business.
Debt: A debt security is similar to a standard loan, like a car loan. It can be bought and sold between two parties and basic terms such as amount borrowed, interest rate and loan repayment date are determined up front. Debt securities are often attractive to those who want to retain full control of their company and believe they’ll be able to handle fixed payments for the duration of the security.
Revenue Share: Revenue shares are very similar to debt securities – the main difference being that the interest rate and loan repayment date depend on how well the business does. Businesses pay back a percent of net revenue each quarter until the loan is paid in full. When the business is doing well, investors may receive larger payments; when the business is slow, payments will be lower. Offering revenue share instruments allow businesses to retain full control of their company and can be favorable if a fixed payment amount can’t be supported or if their revenue is cyclical in nature (for example, a business that realizes most of its revenue during the winter holidays).
While there will be additional factors to consider when setting the terms of an equity crowdfunding raise, this is a good start and overview of what to expect. Have additional questions? Reach out to us today.