1: What is Crowdfunding on Equifund Ventures?
Crowdfunding on Equifund Ventures is the transaction that allows a group of individuals to invest in the securities or debt offering of a private company. Equifund Ventures is an online technology provider.
2: What are the different types of offerings companies make on Equifund Ventures.
- Debt – You can invest in a debt/loan based offering, where the issuer commits to paying you a predetermined interest rate along with the full return of the principal amount. These interest and principal payments, traditionally amortized, are dispersed according to a payment schedule found in the offering documents. The offering can be secured (backed by assets in case the company cannot repay) or unsecured (supported only by the issuer’s creditworthiness – no collateral).
Investors are subject to several risk, including (i) the company is unable to make several or all loan payments resulting in the complete loss of your investment (default risk), (ii) a secondary market for you to trade your loan may never develop so you will have to hold the loan until its term ends (liquidity risk), (iii) a change in interest rates may affect the value of your loan (interest rate risks), (iv) you do not have any voting rights in the company and therefore cannot participate in major decisions affecting the company, and (vii) for secured loans, the value of the collateral may decrease or be insufficient to cover the loan amount in the event of default.
- Convertible Notes – this investing instrument is a short-term debt security (see above) that converts into equity upon a specific event, typically when the company completes a financing round. Investors should pay careful attention to the terms of the conversion; such as valuation caps and discount rates or any other events that trigger the conversion.
Convertible Notes typically will convert upon the occurrence of a specific event such as the capital closing a new round of private financing or an initial public offering. The amount of equity that the note will convert into typically depends on the valuation of the company at the next round of financing but may include a valuation cap. Investors should carefully review the note to understand the terms, structure and what if any limitations exist. There is no guarantee that the events which trigger conversion of the convertible note into equity will ever occur or will occur on favorable terms. The company may be unable to make any principal or interest payments. You may lose your entire investment.
- Common stock – Investing in common stock gives you an ownership stake in the company, but not necessarily voting rights or a right to claim a dividend in the event of the company making a profit. Therefore, it is imperative to read the offering documents before making an investment.
Investors in common stock may lose some or all their investment if the company is unsuccessful so you should not invest any amount that you cannot afford to lose. In the event of bankruptcy, debt and other financial obligations are paid before equity holders so there might not be enough assets to recover any part of your investment. The company may issue preferred securities or other securities with rights greater than the rights of common stock holders, including dividend rights, liquidation preferences, greater voting rights or representation on the board of directors. Minority shareholders will have very little ability to influence the direction of the company when it comes to voting. The valuation of the company may have been arbitrarily determined. Future rounds of financing may occur at a lower valuation (called a “down round”) which will result in the decrease value of your investment. If the company issues additional securities, which you should anticipate in new ventures, then your percentage ownership of the company will decrease (also called “dilution”).
- Preferred stock – Preferred stock is an equity security issued by the company that holds certain preferred rights attached to it. Preferred stock owners are given a higher stake claim over the common stock owners in regard to liquidity events, dividend distribution or debt repayments. They are traditionally accompanied by special voting rights etc.
- SAFE – Simple Agreement for Future Equity (SAFE) – is a cash investment in a company with the right to receive equity in the company at a future date upon certain terms and conditions.
A SAFE is not common stock and does not represent a current equity stake in a company. Instead, the terms of a SAFE must be met for you to receive your equity stake. A SAFE may only convert to equity if certain triggering events occur, and depending on its terms, a SAFE may not be triggered at all.
* Investors need to be aware that companies dictate the terms of their offering, including rights and obligations that are attached to the various securities. You should carefully read the offering documents, including the “Form 1-A”, to understand the securities being offered.
3: How long does it take to invest in a company?
Once you’ve become a registered user of Equifund Ventures, you can immediately invest in the companies listed on Equifund Ventures.
4: How to monetize investments made through crowdfunding?
Investments made through Regulation Crowdfunding, while risky, can be fruitful. Please refer to our Course V – Exit Gates to understand the potential ways of monetizing investments made in Crowdfunding.
5: What are the other forms of Crowdfunding?
- Reward-based – Raising funds online for a project in exchange of predetermined rewards or goods. In this crowdfunding mechanism, you are not receiving an ownership interest in a company but rather a gift or reward for helping a new venture.
- Donation based – Raising funds online for a cause, where no return of any kind is expected or proposed.
- Loan or Debt based – Raising secured or unsecured funds through the internet for a company project or person in exchange of an interest payout along with the return of the principal amount.