In our previous article, we covered how Equity Crowdfunding is not as risky as many people perceive it. Now we will cover two more myths:
Myth 2: VC and Equity Crowdfunding are antagonists
Another common myth is that equity crowdfunding and venture capital are opposed concepts. They are not.
First, there is nothing that impedes an equity crowdfunded project to attract investment from VCs in a later stage. It can be expensive for the VCs, but their investment goes to a proven company, so that’s likely to happen.
Second, many platforms have VC companies or individuals among their accredited investors. That means VC and equity crowdfunding can blend perfectly together.
Third, companies need to sell as much as they can, hire as many people as possible, and raise funds via every cost-effective way. Equity crowdfunding is a good way to advertise that a business is receiving investments and raise money from a number of investors, but it is not the only one. In later stages, not even borrowing from a bank or issuing securities in a stocks exchange can be ruled out.
Myth 3: business secrets will be shared among a large number of small investors
Having a large number of investors can be a problem for a startup company. Many people believe that some investors might put in very little money in a number of projects just to get financial statements and business secrets from the most successful ventures, so they could use them in their own companies.
The first myth in the above sentence is that a company will not necessarily get small investments. It is possible to limit not only the number of investors and their accredited status when launching a campaign, but also to establish a start value for the investment level.
The second myth is about sharing business secrets. There are some reports that must be filled out periodically to inform investors about the performance, but the startup is not a public company, so internal procedures and products under development that have not been patented yet, as well as key management decisions, do not necessarily need to be shared with all investors.
In essence, all that investors in a startup company hold is a convertible security that allows them to have a share of the company in a later period. We can expect that most investors will not want to be part of the business, by collecting their profits when the startup is sold.