Crowdfunding is a method of generating cash in which a large number of people contribute modest amounts of money. This mechanism has been in place for many years.
It enables businesses to generate funds from investors in exchange for a share of their firm, what we know as equity, as well as non-accredited investors, such as ordinary individuals, to invest their own money in startups.
If you have a brilliant company concept that you believe will make an impact but have trouble raising funds to get launched, crowdfunding might be your best bet. However, you must be cautious as an enthusiastic aspiring entrepreneur. If you make haste without thinking, you could end up in a lot of problems.
Here are some precautions to take when crowdfunding
Don’t gather $1 million from a million persons
Entrepreneurs should avoid this until they have determined the maximum number of people with whom they can work.
Plan out an investor relations strategy initially as an entrepreneur. It should include information on how and when you will communicate with investors and answer their questions.
Furthermore, inform your investors of your plans. Managing relationships with dozens or hundreds of investors will get daunting otherwise.
Also read, What you should know about Crowdfunding in Nigeria
Don’t take money from just anyone
You don’t want to be in a situation where you’re taking money that was gained unlawfully.
If you take money from someone who gained it by deception, you are legally obligated to repay it. You could be completely devastated if you do not keep track of where your money is coming from.
As a new entrepreneur, keep an eye on your investors and conduct some research on them so you don’t wind up collecting unlawful funds that can bankrupt your company.
Maintain control over your business
Many entrepreneurs, particularly beginners, are not used to being held responsible to shareholders. While you’re getting started, keep in mind that you’ll have to deal with all of the negative aspects of public corporations, such as unhappy shareholders.
If you’re raising funds through equity crowdfunding, you’ll want to be careful about how much authority you provide your backers. You don’t offer these types of investors the same treatment as venture capitalists.
This is because these individuals can often impact key decisions in a startup, and you wouldn’t want any crowd investors, particularly those you don’t know well, to have the power to effect major company decisions such as employing and firing the CEO, selling the startup, securing capital, or taking loans.
Draw the parameters of the exchange
Establish the parameters for crowd investments beforehand, preferably with the aid of a legal counsel or trustworthy advisor, to minimize confusion later on. Set the ground rules up front; this is what you’re getting right now, this is how we arrived at this price, this is how it might alter in the future, and these are your rights if there are any additional fundraising rounds.
Ensure that crowd investors realize that if they invest $1,000 in a firm that equals 10% of the business at the time of investment, that $1,000 will no longer value 10% of the business if a company expands and receives additional rounds of investment.
As fresh income is generated, establish that the original investors will hold a lower percentage of the company.
Crowdfunding has become one of the most popular funding options for people wishing to start a business, but while you’re doing so, keep these measures in mind to help you stay on top of your game in the near future.
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