Pitching your business to venture capitalists may not be in the cards for first-time entrepreneurs or small companies. However, equity crowdfunding can help your company find both accredited investors and everyday people willing to support and fund your company.

Equity crowdfunding isn't the same as rewards-based crowdfunding. It has no debt component; instead, investors get ownership in your company.

Equity crowdfunding is a method of raising capital online from investors to fund a private company. In return for cash, investors receive equity ownership in the company. Equity crowdfunding takes place on online platforms where companies create profiles that include their pitches, financial statements, and other relevant information for investors to make informed investment decisions.

Crowdfunding platforms may charge a percentage of funds raised for their services; many levy a monthly listing fee; some charge additional payment processing fees. You may also need to pay for services, such as accounting, to ensure the paperwork is organized.

Equity crowdfunding is regulated by the U.S. Securities and Exchange Commission (SEC). The SEC allows private companies to legally raise up to $5 million in a 12-month period through equity crowdfunding. You can raise funds in increments. Investors can be accredited (i.e., they satisfy asset, income, employment or other requirements) or everyday consumers, including family, friends, and business associates who are bullish on your company’s success.

By design, crowdfunding requires that campaigns are appealing, either because of the innovative or disruptive potential of the company or because of the mass appeal of the product or service. Campaign momentum is often created and maintained by how engaging your idea is. Therefore, if you fail to create and maintain this buzz, it can be very difficult to deliver a successful outcome.

Selling shares of your company is an alternative to a business loan. Equity crowdfunding can also be an option for companies with strong growth potential. However, like any type of funding, it has both pros and cons:

Pros of equity crowdfunding

• Selling shares to multiple investors may raise more capital.

• Equity platforms may pool the capital into a single investment, streamlining the accounting and financial reporting.

• No loan repayments or debt-related credit checks required.

• Potential buzz about your company and connections to potential customers.

Cons of equity crowdfunding:

• Selling part of your company could be problematic if investors want a say in your operations.

• You’ll need to spend time creating a persuasive corporate package to include marketing plans, financial projections and a video that communicates the value of your idea.

• You must comply with state and federal security filing rules. You also have a fiduciary duty to disclose to shareholders concerning the overall health and status of the company.

Every crowdfunding platform has its own unique features while attracting a different type of audience. You should select the crowdfunding platform that will likely have the best synergy with your company. This significantly raises the prospect of the crowdfunding campaign being successful.

As a general rule, crowdfunding platforms either have a technology or social impact focus. Choose the one that is likely to have the greatest synergy with your company to optimize the chances of a successful campaign.

It’s easy to simply pick a random figure, but this is not recommended. Most crowdfunding platforms operate on a system of ‘all or nothing’ - if you fail to accumulate every penny of your target total, you get absolutely nothing.

Setting a target which is excessive can leave you struggling to reach it. However, setting a target that is too low can leave your company without enough capital. Some crowdfunding platforms do allow you to fund beyond your target, but many do not; setting a target figure which has been calculated based on costs will help ensure that you don’t miss the mark.

It's important to note that crowdfunding platforms work on a commission basis. You should factor in a certain percentage of the proceeds (e.g., 1-3%, for example) to account for that.

Simplicity is one of the cornerstones of crowdfunding success. When an investor can identify the clear value proposition of what you are doing, they will be much more likely to invest than if your campaign is convoluted or complex. Keep it short, simple, and succinct.

This is important to have in all crowdfunding campaigns, but especially when it comes to equity-based crowdfunding. Investors want to be reassured that the money will be used for the growth and development of the company and not just to maintain it as it currently operates. This should not be an afterthought of the campaign, but rather the stimulus for it; the best crowdfunding campaigns are those that grow from a firm desire for business development, with a clear strategy of how to achieve this.

Having a clear vision of how the company will utilize the proceeds if your campaign is successful will also give you the opportunity to focus your efforts on ensuring success with a plan of action for the end of the campaign.

This is important for equity-based crowdfunding, but uniquely so within the rewards-based model. That is because this system operates on a contractual agreement that certain ‘rewards’ will be provided to investors based on the value of their contribution to the campaign.

Ensure that the promises you make are ones that you are, for all practical purposes, realistically able to keep.

In our experience, many companies find themselves overwhelmed by the rewards they have promised to deliver. Therefore, ensure that the promises you make are ones that you are realistically able to keep, and won’t occupy all of the money you make.

Crowdfunding is easily and readily accessible that management often doesn’t carefully consider whether their company is at the optimum stage of development to yield the greatest rewards from the process. It is a difficult one to measure but taking a commonsense approach to the question is the best way of avoiding any untimely mistakes; if you have major concerns about whether the timing is right, then it probably isn’t. This is where it can be useful to enlist the support of someone who has direct experience of crowdfunding a company as they will likely be able to provide valuable insights that could prove instrumental when considering your suitability for launching a crowdfunding campaign.

There are several challenges or obstacles that your company may face when using a crowdfunding platform to raise capital. They range from meeting investor expectations, knowing how much capital to raise, selecting the right platform, protecting your unique ideas or intellectual property, building trust among investors, and others.