Startups that are looking to raise initial capital usually decide between crowdfunding their product/business and seeking seed/angel investment. Both have their benefits and drawbacks, and both have different legal requirements. For the purposes of this article, the discussion about crowdfunding will refer to the Kickstarter/Indiegogo rewards-based crowdfunding. One of the primary benefits of crowdfunding, as opposed to seeking investment, is that a startup does not have to give up equity or take on debt in order to receive cash. Of course, most crowdfunding platforms take a percentage of the money raised (sometimes in excess of 10%) as a fee. In addition, if the rewards for backing are the company’s products or services, crowdfunding can allow a startup to gain customers who are likely to be more evangelical about the company and its products. However, the downside of crowdfunding where the rewards are the products or services to be developed is that the company must then actually produce the reward within the timeframe promised. It takes a bit of trust for someone to make a crowdfunding contribution, so when a company doesn’t keep its promises by not delivering on time, or delivering a product that doesn’t live up to its billing. At best, a company loses credibility; at worst, the company could be looking at legal liabilities based on breach of contract or unfair and deceptive business practices. Related to this, a company that crowd funds must keep the lines of dialogue open with their backers, to continue to update them on the progress of the project, and inform them of delays and setbacks as soon as practically possible. Conversely, a company that obtains seed or angel funding has fewer backers to maintain relationships with. And particularly when dealing with angel investors, they can bring advice and connections to help with the growth of your business that crowdfunding backers generally do not bring. Of course, for this strategic help and capital infusion, a startup must either give up equity or take on debt. In addition, seeking investment triggers many compliance requirements under the securities laws — filings are almost certainly required, and filings will likely also be necessary in the states where the investment was solicited from. And although the legal work and due diligence at the seed/angel stage probably won’t be as intensive as during a Series A investment, it will likely be enough, in conjunction with securities requirements, to necessitate the assistance of an attorney to get through the process — so that like the crowdfunding process, there is a cost attached to raising the capital.
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