Crowdfunding is an innovative solution for startups. It involves entrepreneurs, startups, or companies seeking Internet users’ assistance, support, and funding. In return, backers may receive ready-to-use products or shopping discounts. These products or services are often limited and cater to a specific target audience. This type of funding can be applied to various ventures, as long as it complies with the law. Common crowdfunding categories include games, electronics, travel accessories, and unique services.
In this article, we focus on the more advantageous aspects of crowdfunding. If you want to start with the basics, read our other article on that topic.
Crowdfunding models
Crowdfunding offers diverse funding options, each typically governed by different regulations. If you’re considering this service for your startup, explore these various options:
- Foundation Crowdfunding. In this model, supporters make deposits without any specific agreements.
- Reward-Based One. Supporters receive specific benefits, which may not necessarily equate to the financial support provided.
- Crowdfunding Based on Pre-Sales. Backers contribute money for a specific product, and then after production, they’ll get the limited items.
- Shareholder Crowdfunding. Individuals interested in assisting your startup can purchase shares or stocks in your company.
- Debt Crowdfunding. People provide financial assistance to startups, with the expectation of repayment after certain milestones or processes.
Legal Considerations
While crowdfunding offers flexibility, it doesn’t exempt you from adhering to legal requirements. Even though there isn’t specific regulation, you must follow the rules associated with the type of contract you establish with your supporters.
Legal Relationships
Using crowdfunding creates two primary legal relationships.
One is between your startup and the funding platform, while the other is between your startup and the supporters:
Startup and Platform
Funding platforms typically enforce strict rules regarding financial operations. It’s crucial to thoroughly review the agreement, paying particular attention to the startup’s liability provisions. Platforms often try to impose resolutions that give them full responsibility for content posted on their platforms.
Startup and Supporters
In addition to the agreement with the funding platform, you’ll need to manage the legal relationship with your supporters. Remember that this may also entail a consumer contract, implying specific obligations and restrictions for your startup concerning its supporters.
Crowdfunding vs crowd investing
The difference between the two is that in crowdfunding, ‘investors’ receive a service or product instead of financial support, whereas, in crowd investing, people gain property rights, ownership rights (stocks, shares), and future financial benefits.
If you’re interested in utilizing crowdfunding services from a foreign country, be doubly cautious about legal assessments. Seek advice from legal and tax advisors well-versed in the jurisdiction you’re dealing with. Keep in mind that offers on foreign platforms are likely governed by foreign laws, and any disputes will be resolved in foreign courts.
Examples of successfully bootstrapped startups
Exploding Kittens is a card game that humorously describes itself as “a game for people who are terrible at charades.” In 2015, it became the most-backed Kickstarter project of all time, attracting over 219,380 backers. A pledge of $20 or more earned backers a copy of the game, which features whimsical elements like magical enchiladas and murderous kittens. The game’s popularity helped it raise over $8 million.
Flow Hive is a beehive box designed for home use, allowing easy honey extraction without disturbing the bees. In 2015, Flow Hive launched an Indiegogo campaign with a goal of $70,000 to fund their product. The campaign quickly went viral, raising $250,000 in pre-orders and breaking several Indiegogo records, including being the fastest campaign to reach $2 million. Ultimately, the product raised over $13 million.
This text is from our original e-book on startup financing. To learn more about startup financing, visit our website and download the free e-book.
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