In an entrepreneurial era when the opportunities for startup entrepreneurs of genius amount to a lot more reliance on angel investors and venture capitalists, crowdfunding is a powerful and a virile method of raising funds. Crowdfunding is also called by several variants such as crowd financing, crowd investing and crowd lending. Sometimes, crowd funding is also called Peer to Peer lending which has been rechristened as ‘Marketplace Lending’. Reflecting on the wide variety of activities that include businesses, disaster relief, citizen journalism etc. to which crowdfunding can be used, crowdfunding is nothing short of god-send-tool for raising money and winning the approval of intended audiences.
Here is an indispensable read on types of crowdfunding in its entirety:
In this type of crowdfunding, investors invest large amounts of money to get a lion’s piece of equity in the startup. More often than not, equity based crowdfunding is used typically used for the growth of the company. Equity based crowdfunding offers the comforting finitude of raising money from venture capitalists and angel investors. In India, this type of crowdfunding is deemed illegal. SEBI (Securities and Exchange Board of India) is the only stakeholder that can frame guidelines for making it perfectly legal.
Suggested Read: How to craft a successful crowdfunding pitch
This is indeed the most common form of crowdfunding in US. As the name suggests, investors receive a tangible product for their investments. For example, if your startup produces wearable devices and if investors invest some money, you ought to repay them over a period of time in terms of tangible wearable devices such as smart watches, mobile beacons etc. This is perfectly legal in India. To quote an example, Fundlined is a reward-based crowdfunding platform.
Suggested Read: Decoding Crowdfunding with Tulsi Khemka
Donors donate small amounts for noble causes. Donations can be as low as a penny to as high as billion dollars. Donation-based crowdfunding typically doesn’t involve rewarding investors tangibly. It is undoubtedly true that donors donate significant amounts and contribute wholeheartedly for the welfare of the society in particular and country in general. For example, philanthropists such as Ratan Tata contribute a lot and hence, he is widely revered.
In debt crowdfunding you are also investing in a security of the company (namely a debt instrument of some type) where your goal is to loan your money to the company with a fixed repayment term and the company pays you a specified interest rate during the term of the loan. Investors can work with various debt instruments when entering into a debt-based crowdfunding agreement. Some instruments allow for entering into shares that relate to potential company growth whereas others are strictly interest-based. Additionally, there are secured and unsecured debt instruments. Interest rates are typically based on the level of risk associated with a particular startup or entity (Source: crowdfund.co)
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