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Pros and cons of crowdfunding

Crowdfunding is becoming an increasingly popular way of investing in a start-up or expanding businesses. Traditionally new businesses would raise capital by obtaining big investments from a small number of individuals. Crowdfunding on the other hand switches this idea around and allows people to finance their business using an online platform showcasing their ideas. This has the ability to reach not only thousands but millions of potential investors.

Shabnam Komayli of Gregg Latchams Limited lists the Pros and Cons of this new way of funding and how a solicitor can assist you on your journey below:

Pros:

Income – A goal is set for how much money needs to be raised, only once the target has been reached will the money be given to your business. Some businesses can raise thousands of pounds within a few days, having instant access to funds straight away. A cash injection when you are starting up can allow you to focus on other aspects of growing your business.

Honest Feedback – You can invite input from the mass market, who can give instant feedback on ways to improve your business and modify your campaign to attract potential investors.

Credibility – well known crowdfunding sites inspect projects before crowdfunding can commence. This demonstrates to potential investors that your business is legitimate and can be taken seriously. Often niche businesses find it more difficult to get the attention they deserve, so having the backing of a crowdfunding website can really boost their profile. It would be a good idea to involve a solicitor at this stage to work alongside the crowdfunding process, to help you negotiate a bespoke deal.

Cons:

All-or-nothing – If your crowdfunding goal has not been met, the money will be returned to the potential investors, e.g. if a goal is set for £10,000 and only £9,500 is raised, then your business goes away with nothing. Before setting out on your crowdfunding journey, consider having a roundtable meeting with a solicitor and your accountant to set a realistic goal.

Intellectual Property – you need to consider how much detail you go into when pitching your idea online. If too much detail is provided then there is a risk that your idea will be copied, whereas not enough detail is unlikely to attract investment. Consider speaking to a solicitor specialising in Intellectual Property to discuss potential ways of minimising your risk.

Affect future financing – In the event that your crowdfunding scheme fails, the evidence of that failed scheme will remain on the crowdfunding website. Consequently future investors may look upon this unfavourably, as they have the opportunity to look at the quality of your campaign and can take their money elsewhere. To avoid this pitfall you need to ensure enough time, effort and initial funds have been devoted to making a good campaign from the outset.

May not be worth it – Crowdfunding is mostly associated with raising large sums of capital. It may not be worthwhile in the long run for your business, if you only wish to raise a small amount of money. It may be more sensible to obtain a loan or borrow from friends or family. In which case a Gregg Latchams can offer services, to set up your business which may ultimately be more straightforward and cost efficient in the long term.

Automated documents – the crowdfunding website will use automated documents, which include standard form Investment Agreements and Articles of Association. In this instance using solicitor will be more beneficial as they can tailor such documents and agreements to fit the specific needs of your business. A solicitor can also ensure that you do not agree to anything that may be detrimental to your business in the future.

If you would like a discussion or advice regarding crowdfunding schemes or setting up a new business, please contact Ben Harris (ben.harris@gregglatchams.com) an Associate Solicitor within our Corporate SME Team.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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