Crowdfunding is a powerful fundraising method and there are several legal aspects to be aware of before proceeding to crowdfunding shareholders agreement. The article discusses crowdfunding and shareholders’ agreement differences and interconnectivity. The crowdfunding method started being popular in 2009 when major start-ups got off the ground by gathering donations from large groups of people.
Companies can proceed to fundraising from friends, relatives, banks or venture capital firms through crowdfunding
Startups can gather small to large amounts of capital from people they do not know. To do so, a startup must register and create an account on an online crowdfunding platform and present the business idea in order for people to donate money.
Crowdfunding can be different from acquiring shares in a company.
There are two types of crowdfunding – rewards-based crowdfunding and equity-based crowdfunding.
In the case of rewards-based crowdfunding the person funding the business does not receive equity, nor is entitled to be repaid. The way it works is that the people donating receive some other incentive in exchange for their monetary contribution (such as a first-run product or a sample). This is the case in many instances and represents essentially a pre-sale of the product.
With equity-based crowdfunding the person funding the business receives shares in the company and the number of shares is proportional to the amount of the contribution. This is an investment and not a donation.
A shareholders’ agreement is an arrangement between the shareholders of an existing company and sets out how the rights and obligations are divided between them
Unlike with the rewards-based crowdfunding, here the parties are investors in the company. For instance, the shareholders agreement is essential when starting a business that involves more than one investor. The shareholders’ agreement lays out each shareholders’ contribution to the company.
However, even if the company has a shareholders’ agreement it does not mean that the document should be disclosed to the crowdfunding platform. The only important aspects to consider are whether the shareholders’ agreement restricts the company’s ability to raise funds through crowdfunding and whether the investors are required to sign the shareholders’ agreement. Besides these aspects, it is also important to consider the fundraising process in general and how it affects the terms of the shareholders’ agreement.
A crucial part to consider is whether raising funds by equity-based crowdfunding makes the company less attractive to potential investors. There is a slight hesitation in regard to investors’ willingness to get involved in a company owned partly by the crowd. However, the company’s attractiveness to investors depends on the amount of the crowd investment and the level of control the crowd has.
To summarize, crowdfunding is a good method to secure startup financing and help companies advertise their product. However, there are other solutions for long-term business financing. Some of these solutions include access to bank loans, online lenders, personal loans or business credit cards.
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