If you are into equity crowdfunding, I will be glad if you can help me solve this misery.

Discussion in 'Educational Resources' started by Phill Twist, Dec 1, 2016.

  1. · What made you venture into equity crowdfunding?

    · On what basis did you choose your equity crowdfunding platform?

    · How did you choose your investments?

    · Were you not scared that Startups have a high failure rate and you could lose every penny of your initial investment?

    · I know that Startup financials may not be transparent at times. Were you not scared as an investor that you had no in-depth auditing of what you were funding?

    · There is also a tenacity that estimated valuations on some startups might be wrong, meaning investments in them are priced at “estimated fair values.” These best-guess estimates may not reflect the actual amount that would be realized in a sale. How did you overcome this?

    · Did you prepare mentally, emotionally and financially to lose your entire investment in a particular funded startup?
     
  2. gkishot

    gkishot

    There is a reason why the majority of crowdfunding projects are available for accredited investors only.
     
  3. Jamie J.

    Jamie J.

    I often see articles about it's a great way to invest in start-ups. But I think that as any business it also has its disadvantages and risks.
     
  4. Sig

    Sig

    It's an absolutely horrible way to invest in a startup. Even sophisticated angel investors are almost always crammed down and get screwed by every subsequent round unless they have the cash to participate as a meaningful co-invest (i.e. 1/4 or more of a round even if it's a $50M round) And that's with positive stories, with down rounds they end up with nothing pretty fast. Same thing happens with founders and early employees who leave and generally find themselves with essentially worthless classes of the stock of a successful company.
    If you're one of hundreds of early stage investors you'll have no say whatsoever in future rounds and no VC will invest in a company with a cap table that includes hundreds of people, so you can pretty much be sure you'll end up with nothing in the end. Crowd funding can be fun if you think of yourself as essentially being a volunteer in something new and exciting. You'll probably get inside info on how the company is doing and how their products are working and can live the startup dream vicariously just a tiny bit, but don't ever fool yourself into thinking you're investing.
     
  5. Jamie J.

    Jamie J.

    Well, it's interesting. Isn't the crowdfunding as good for an investor as it's described? Is it worthless to deal with it?
     
  6. Sig

    Sig

    Startups are a completely different world from public equities and not just because of the risk. Take the term sheet. The difference between term sheets is so great that many startups would rather have a $5M round with a decent term sheet than a $20M round with a poor one even if both give up an equal amount of equity, or would rather take nothing than a bad term sheet. On the flip side, guess what kind of term sheet you're getting as a crowd funding investor?
    In a related subject, you won't have control nor will your class of shares have control of the company, and the term sheet will have things like drag along rights and co-investment requirements. That means if the majority of shareholders decide that they want to create a new class of shares that dilutes the existing crowd-funders from a collective 20% of the company to a collective .2% of the company they can and there's f-all you can do about it. If they decide they want to buy you out for cents on the dollar, you have to participate. These would be academic discussions but for the fact that any subsequent round investors will flat out refuse to invest in a company that has several hundred shareholders with any kind of influence or that will take any share of the profits of the company. In order to get a subsequent round, the company will have to cram you down despite the best of intentions they had going in. The drama goes on and on, it's one of the few crappy parts about being an entrepreneur.
    Don't get me wrong, being involved in a startup is a lot of fun and some of the more self-aware and ethical startups using crowd sourcing are making it worth your while by providing you access to beta versions of their product before anyone else, getting you an inside view of the evolution of the company.... If that's worth you donating a few dollars for then I highly recommend it, but again look at it as purchasing an experience, not investing to get a return.
     
  7. Jamie J.

    Jamie J.

    Thanks for your time. It's getting more interesting to me. I need to learn these differences in details, and then I'll be able to share my experiences with you.;)
     
  8. Sig

    Sig

    Would love to hear them, especially your successes and anything that runs counter to my not so sunny opinions. I'd really like to see crowdsourcing work for both the investors and entrepreneurs, so I'll be excited when I hear of cases where it has.