FAQ

In Crowd Equity - Frequently Asked Questions

Investors

Investing in Startups

What is investing in startups about?
Investing in startups is about picking new businesses that you think have the potential to grow. You invest money in them in exchange for a portion of their equity, meaning that you buy shares in their business. If a business you’ve invested in succeeds, the shares that you own will become worth more than you paid for them. However, if the business fails – as the majority of startups do – you’ll lose your investment.

Can investing in startups be profitable?
The data we use to support the proposition that investing in startups can be profitable comes from a major study on angel investing, Technology and the Arts (NESTA) and the British Business Angels Association (BBAA) in 2009. To our knowledge, this report is the most comprehensive study of returns from angel investing in the UK ever published. When considering the report you should bear in mind that the distribution of returns from startups is highly skewed – meaning that the majority of startups fail, and most of the profits come from a few big successes.

Can I invest from outside of Europe?
We may be able to authorise a small number of investors outside of Europe to invest in a particular campaign if they have a sufficiently strong pre-existing connection with the entrepreneur. Please contact info@incrowdequity.com for further details. 

Will investing in startups continue to be as profitable in the future?
No one can say for sure, but we predict that it will become even more profitable, especially relative to other asset classes. In a world where the creation of value is increasingly driven by innovation and adaptability rather than scale, businesses that are small and agile are well-positioned to outperform their bigger, slower counterparts. There will continue to be many failures of course, but we think that there will be more, and larger, successes, meaning that increasingly outsized returns will be available to investors in startups. 

What are the other benefits of investing in startups?

Beyond the potential profits, investors can enjoy a few additional benefits from investing in startups.
First, it’s a chance to be a part of the next big thing – to be like the dragons on BBC2’s Dragon’s Den and pick exciting businesses, follow their progress as they grow and get credit and recognition for having been one of the first people to spot them.

Second, you get to contribute to the culture of innovation by supporting entrepreneurs when they need it most and giving them a chance to get great new businesses off the ground.

And, it is the opportunity to support your friends and family on their exciting new business endeavour.
For many people neither of these is as important as the financial returns, but at the very least they can be nice add-ons.

Why do startups need my money?
When an entrepreneur starts a new venture, he or she usually needs money to turn the idea into the beginnings of an actual business that can reach out to customers and later-stage investors. Depending on the business, this capital might allow the entrepreneur to build a minimum viable product (technology startups), buy equipment (manufacturing startups), lease space and acquire inventory (retailing startups) and so forth.
Making Investments Through In Crowd Equity.

Does In Crowd Equity review each campaign's Q&A section?
We do not review or approve the content in the Q&A which accompanies In Crowd Equity campaigns. The Q&A constitutes “one-off communications” between entrepreneurs and potential investors and should be treated as one-on-one conversations. It is the responsibility of a campaigning entrepreneur to monitor and respond to questions raised in their Q&A and respond to them accordingly. We are not able to remove Q&A content on request, however, we do reserve the right to remove any content in the Q&A that we consider spam, abuse or trolling.

How do I use In Crowd Equity to invest in startups?
In Crowd Equity allows registered investors to browse investment campaigns, learn more about startups looking for funding, make investments in the ones you like and watch as the businesses you’ve invested in grow, all directly through the website. Whenever there is a return on your investment – such as when the business pays a dividend, floats on a stock exchange or is bought by another company – the money will get paid directly to you.

Does In Crowd Equity vet investment campaigns that go live on the platform?
Yes. We review all of the information that a startup provides, as well as evidence it submits to support factual statements, and we only post campaigns for investors to see if we conclude that the information is fair, clear and not misleading.

Will In Crowd Equity advise me which startups to invest in?
No. While we confirm and approve all the information provided by each startup, we generally do not make our own judgement about whether it’s a good business. We believe that when it comes to startups, a large number of small investors are better suited to assess the business’s prospects than a few professional managers. That said, we do our best to exclude businesses that are proposing to do something illegal, unethical or just not viable.

Is there a minimum or a maximum I can invest in a In Crowd Equity campaign?

The minimum is generally £10 per investment (£100 for funds). In some cases the company’s share price requires us to set the minimum slightly higher.

Given the risk profile and returns distribution of startups as an asset class, however, we strongly suggest that you seek to build a balanced portfolio of at least 15-20 individual
investments.

The maximum you can invest is however much money a startup is seeking, less anything that’s already been committed by other investors.

Is there a minimum or a maximum that a startup can raise through In Crowd Equity?
There is no minimum or maximum. However, our focus is primarily on seed and early-stage businesses, and so most campaigns on In Crowd Equity are raising amounts of money appropriate to businesses at that stage of development.

How much equity will I receive for my investment?
Each startup decides how much money it wants to raise in exchange for what percentage of its equity, and your equity interest will be proportionate to the size of your investment. So, if a startup campaign is seeking to raise £50,000 in exchange for 20% of its equity, and you invest £500 (1% of £50,000), you will receive 0.20% (1% of 20%) of the startup’s equity.

How do I transfer the money to make an investment?

There are currently two ways to deposit money into your dedicated In Crowd Equity investor account:
Debit card – You can deposit directly into your In Crowd Equity account via debit card payment from any bank account in a supported country. Our secure debit card processor, Stripe, handles these payments. This is our fastest deposit method.

Bank transfer – Using your unique reference number, found on the “Your Account” page, investors can deposit into their In Crowd Equity account by initiating a standard electronic bank transfer (also referred to as a payment). Bank transfers can take up to three full business days to clear your In Crowd Equity account.

We do not charge any fees on either of these deposit methods.

Is the money in my In Crowd Equity account safe?

Yes. Any money you transfer into your In Crowd Equity account is held in a dedicated client money account at a major UK bank. This account – which is the same type of account that a law firm would use to hold money on your behalf – is segregated from our own accounts. This means that money can only be taken in or out of it on your instructions, and that even if In Crowd Equity became insolvent, there is no chance that your money could be reached by our creditors. While investing in startups is an inherently risky business, we have made sure that you don’t bear any risk until you actually make an investment.

The ability to hold client money is one of many permissions granted to us by the Financial Conduct Authority. Learn more about our permissions on the FCA Register (http://www.fsa.gov.uk/register/firmBasicDetails.do?sid=268747).

When can I deposit money into my account?


Investors can make deposits into their dedicated In Crowd Equity account at any time, either immediately following an initiated investment or between investments to maintain a balance.

To deposit immediately after initiating an investment, simply follow the process and choose to deposit via Stripe debit card deposit, electronic bank transfer or GoCardless direct debit (UK investors only). Depending on the deposit method selected, it can take up to 10 business days for a deposit to clear, so please initiate a deposit within 48 hours after making an investment to ensure your account has a sufficient balance before your investment expires.

Investors can also deposit funds on an ad hoc basis to maintain an account balance. To make a deposit into your account without a specific investment reference, please visit the “Your Account” page, click on the “Deposit” button and choose your preferred method of deposit.

What happens if I invest but the campaign doesn't receive all the money it needs?
You’ll get your money back in full. In Crowd Equity operates on an all-or-nothing basis, meaning that if the startup does not raise all of the money its campaign is seeking within three months, it gets nothing. So, when you make an investment, your money becomes committed to that startup – meaning that you can no longer withdraw it or invest it elsewhere – but it continues to sit in the client money account. If the startup does not receive commitments for all of the money it is seeking, we credit the money back to you, and you can then withdraw it or invest it in another investment campaign at anytime.

What is 'Overfunding' of campaigns?

After a startup campaign has reached 100% of its funding target, we give entrepreneurs the option of raising more than their target investment amount if the demand is there from keen investors. We call this “Overfunding”.

We operate an all-or-nothing model where entrepreneurs must reach their minimum target or investors get their funds back. But if a campaign goes into Overfunding, the entrepreneur will be able to accept any amount from 100% and up during the remaining duration of their campaign (in exchange for a corresponding amount of additional equity). Entrepreneurs are not required to take investment but reserve the right to accept any amount beyond 100%. Investors who invest during this period have the same rights as investors who invested before the campaign was in overfunding, but do not have the right to withdraw their investment or change their mind and must have funds deposited before they can invest.

Once a campaign has reached its target, will the investment definitely be completed?
No. Once all the money has been invested, we conduct a legal due diligence process and negotiate a legal agreement with the startup on behalf of its investors before the investment is completed. If we identify problems in the legal due diligence process or are unable to agree legal terms, we’ll cancel the investment and credit all of your money back to you, just as we would if the campaign had not received commitments for all of the money it was seeking.

Will my investment be public knowledge?
As a default, investments you make will be visible to other investment-authorised In Crowd Equity members. However, at the time you make the investment you will have the option of not making it public, which means that it won’t be visible to other members (it will show up as “Anonymous”). You should note that even if your investment is private, the investee company will be informed of your identity before the investment is completed, and in certain cases your investment may be recorded in public filings with Companies House or elsewhere.

Why am I having problems using my card to make a payment?

You can make a deposit through Stripe using most European debit cards. However, Stripe does not recognise some debit cards from some countries and you will not be able to use a bank card that is treated as a credit card. If your bank card has a credit element, or is treated as a credit card by the issuer, then you will not be able to use Stripe.

If you can’t make a Stripe payment, then you can still make a transfer to In Crowd Equity using a bank deposit or another payment service such as Transferwise (the fees are much lower than an international bank transfer): https://www.transferwise.com.
Eligibility to Use In Crowd Equity

Who is eligible to join In Crowd Equity?
Anyone who is 18 or older may become a In Crowd Equity member. For now, only residents of European countries (EU/EEA/CH) may make investments through In Crowd Equity. Please note that all investment activity takes place in the UK under UK law.

What are the eligibility requirements in order to make investments through In Crowd Equity?
In order to make investments, you will need to successfully complete our Investment Authorisation Questionnaire (referred to on the site as the Investment Quiz), or self-certify as a “high net worth individual” or a “sophisticated investor”. This is intended to show us that you have the professional judgment and understanding to appreciate the risks and considerations of investing in startups as an asset class.

What types of startups can use In Crowd Equity to raise capital?
A wide range of startups can seek capital through In Crowd Equity, including both high- growth, technology-driven ventures along with more traditional businesses like retail stores, restaurants and professional services firms.

What is KYC?

Like all financial services businesses, we are required by anti-money laundering regulations to verify the identities of our investors. This process is called “Know Your Client”, or “KYC”. You go through our KYC process the first time that you make a deposit into your In Crowd Equity account. You only need to do go through this once.

Automatic KYC: Often we can verify your details automatically when you enter your details on the platform before you make a deposit. We use a third party online database to match your information and do the verification. However, sometimes we are unable to verify your identity this way. This is nothing to worry about and can happen for a number of reasons, for example if you have recently moved house, if the database does not cover the place where you live, or a simple data entry error.

Document KYC: If we can’t identify you using the automatic KYC process, then we will need to verify your identity using documents as evidence of your identify and address. You will be asked to upload copies of the following 2 documents through the platform (which can be scans or photos taken on your mobile phone):

1. Identity: Government issued photo ID (e.g. passport, national ID card, driving licence); and
2. Address: Recent (i.e. within three months) utility bill, bank statement, or a letter from a national or local authority showing your address.
Please note that we require 2 separate documents (even if your government issued photo ID also states your address). Once we have reviewed these documents we will let you know whether you have cleared KYC or whether we require anything else.

Remember that KYC is only required to be completed before you make a deposit into your In Crowd Equity account. However, you can still make investments on the platform before then but it means that you wont be able to pay for such investments until KYC has been completed.
The information that you send us will be used solely to verify your identity and will not be used for any other purposes. Our privacy policy can be accessed at: http://www.seedrs.com/privacy_policy

 

Legal Structure

What am I buying with my investment? Am I buying shares in the startup or something else?

You are buying ordinary shares in the startup. These are the same type of shares that the founders and other early investors will usually have. We then hold those shares for you as your nominee: this is a common way of holding shares on behalf of large numbers of investors and makes it possible for us to take care of the administrative work involved in being a shareholder.

This structure means that you are given the opportunity to vote and receive guaranteed regular updates from your startups directly through the platform, all while we protect your rights with our professional subscription agreement.

 

Why do you hold my shares as nominee?

The nominee structure allows us to manage the investment for you while still giving you the full economic interest in the business. If you held the shares directly, you would have to deal with the various obligations and hassles of being a legal shareholder, and the startup would have to manage the administrative complexities of having a large number of shareholders. By using a nominee structure, you get the benefits of being a shareholder – financial returns, the opportunity to vote and keeping informed about the business’s progress – and the startups get the benefits of your investment without either of you having to face the burdens of a direct shareholding.

That said, if you would like to hold your shares directly, and the company agrees, you are more than welcome to do so. You and the company just need to let us know this at the time you make your investment; you will then need to arrange to execute a separate subscription agreement with the company. If you choose to subscribe for and hold your shares directly like this, we will not charge you our carry on your investment.

 

What legal protections will I have as an investor?

As your nominee, we will enter into a subscription agreement with the startup before completing every investment. This contract, which is very similar to the type of agreement that business angels and venture capitalists enter when they invest in startups, provides you (and us) with a number of rights and protections.

While each subscription agreement may be slightly different, it will generally include provisions such as a requirement that the company provide information to investors on a regular basis (known as “information covenants”), a requirement that if the company is sold the investors are able to sell their interests alongside the founder (known as “tag-along rights”), anti-dilution rights which mean that investors are offered the chance to maintain their percentage shareholding in future rounds and a number of other provisions. In addition, you will be party to an agreement with us (which you will execute online as part of making an investment), and this sets out certain additional rights. If you have any questions about specific legal terms, we encourage you to email us, and we’ll provide you clarification.

 

What's to stop entrepreneurs from running away with my money?

Us. We have a number of measures in place – including upfront checks as well as imposing personal liability on the entrepreneurs for fraud and pursuing criminal charges where appropriate – to ensure that the startup uses the investment for genuine business purposes. The entrepreneurs may make bad business choices, and that’s a risk you bear as an investor, but if any entrepreneur tries to act dishonestly we will investigate and, if appropriate, pursue legal action against him or her. That said, we believe that 99.9% of entrepreneurs are well-intentioned people trying to create great businesses, and we expect only to have to use these measures on rare occasion.

 

What will the tax treatment of my investment be?

In the absence of any relief, your shares will be treated similarly to any other equity investment you might hold, such as shares of a company quoted on the London Stock Exchange.

However, many of the startups raising capital through In Crowd Equity are eligible for either the Enterprise Investment Scheme (EIS) or the even more favourable Seed Enterprise Investment Scheme (SEIS) relief. When you invest in one of those startups, you may be able to claim substantial tax reliefs, including up to 50% income tax relief and CGT exemption or deferral. The startup’s campaign will make clear whether it is eligible for one of those reliefs, but you should bear in mind that your ability to claim the relief will depend on your own tax circumstances, and you should consult with a tax adviser before concluding that the relief will apply to you.

Visit our page on tax reliefs (http://incrowdequity.com/tax-reliefs) to learn more about the SEIS scheme.

 

Which tax reliefs are available for investing in startups?

Startups that appear on the In Crowd Equity platform may be eligible for one of two tax relief schemes: the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS).

The Seed Enterprise Investment Scheme offers eligible investors (investing up to £100,000 per tax year) a combined tax relief of up to 100.5% of their investment through income tax and CGT reliefs.

For example, on an investment of £1,000 into an SEIS qualifying startup:
50% of the investment (£500), may be deducted from an eligible investor individual income tax return;
For 2013/2014 only, capital gains realised during the year can be re- invested into eligible startups without paying CGT, saving a further 14% (£140);
If you sell the SEIS shares at a profit, you won’t pay any CGT; and
If you sell the SEIS shares at a loss, you may be eligible for loss relief of up to an additional 22.5% (£225).
SEIS is a highly tax-advantageous incentive for kick-starting the economy and encouraging participation in exciting, new, high-risk/high-reward businesses. Our SEIS page (http://incrowdequity.com/tax-reliefs) has more information on eligibility for investors and entrepreneurs, along with explanatory video.
The Enterprise Investment Scheme (EIS) offers eligible investors the opportunity to claim back up to 30% of their investment in eligible companies through income tax relief (for investments of up to £1 million). Additionally, you won’t pay any CGT on the disposal of shares at a profit, and you may be able to claim loss relief if you dispose of them at a loss.

For both SEIS and EIS, the HMRC imposes certain conditions in order to prevent tax avoidance. These include a requirement that you hold the shares for at least three years and a requirement that the company not engage in a list of prohibited trades, among others. You can find more information on the conditions for claiming SEIS and EIS reliefs on the HMRC’s website (http://www.hmrc.gov.uk/eis/).

 

In what tax year will my investment be deemed to be made?

When you invest in a startup through In Crowd Equity, there is a period of time between when you commit your funds and when we complete the investment in the company. This is because we only complete an investment after the startup has reached 100% of its funding target and we have finished our legal due diligence process.

For tax purposes, your investment will be deemed to have been made when we complete the investment into the company, not when you commit your funds through In Crowd Equity. For example, if you invest in a startup through In Crowd Equity in January 2014, and we complete the investment in May 2014, you will be deemed to have invested during the 2014-2015 tax year.

We appreciate that this can cause some uncertainty for tax planning purposes, and because we do not know how long it will take a given startup to reach its funding target and finish due diligence, we cannot predict exactly when we will be able to complete an investment in it. However, the law includes extensive carryback provisions for purposes of SEIS and EIS reliefs, which means that in many cases the year in which the investment is completed will not materially affect your tax position.

For more information on the carryback (and other) rules that will apply to your
investments, please visit the EIS (http://www.hmrc.gov.uk/eis/) and SEIS (http://www.hmrc.gov.uk/seedeis/index.htm) sections of HMRC’s website.

 

 

Post-Investment Process

Do I need to manage the investment once I've made it?
No. We manage the investment as your nominee, including signing documents, requesting regular trading updates and dealing with the various other administrative requirements of being a legal shareholder. However, we’ll keep you up to date on how the business is doing, and you can check the “My Investments” section of the website to read updates from management, media links and other information.

Can I stay involved with the startup after I’ve invested?
Absolutely. In addition to watching the business’s progress through the “Your Investments” section of the website, you’re welcome to reach out to the business to offer support, advice or mentorship at anytime. One of the biggest benefits to a startup in using In Crowd Equity to raise capital is that it can tap the expertise and wisdom of its large base of investors.

How will the startup use my investment?
In the information you see about each startup before you decide whether to invest, the business may disclose what they intend to use the investment for. But startups need to be flexible, and if it turns out that they find a better way to use the money to grow their business, they can do so.

How do I make money off my investment?
The main way you can make money from your investment is if you sell your shares. This is most likely to happen if the business is bought by another company or floats on a stock exchange. However, if you are able to find a private buyer (and that person is or becomes a In Crowd Equity member), you are welcome to sell your shares to him or her on whatever terms you agree. In addition, you will receive any dividend the startup pays on your shares.

How will you distribute this money to me?

Any money you receive from an investment will be credited to your In Crowd Equity account. You can then withdraw that money, or invest it in another startup, at anytime. May I make a follow-on investment in a startup’s future financing rounds?

Although we may not facilitate subsequent financing rounds directly, where possible we will let you know when the startup is looking to raise more money, and you will be free to discuss making an investment with its management. There is no guarantee that they will let you do so, but startups rarely object to their early investors investing more money in a later round.

What happens if the startup I invest in fails?
In some cases the startup will either be wound up or sold for a nominal price, while in other cases the business won’t formally shut down but we’ll write off the investment and dispose of the shares. Any proceeds from these processes will be distributed to you (just as if the shares of a successful startup had been sold), but they’re likely to represent far less than your original investment, and there may not be any proceeds at all..

 

In Crowd Equity in Context

Why do I need In Crowd Equity to be able to invest in startups?
Unless you’re extremely wealthy and have lots of time on your hands, it is very difficult to invest in startups the “traditional” way as a business angel. Due to transaction costs and other considerations, most angels find they need to invest at least £10,000 per startup; and because this is such a hit-or-miss type of investing, many angels try to invest in at least 10 startups and often more. This means that to be an angel, you generally need to have £100,000 or more that you can allocate just to startups (which means you need to have far more than £100,000 in order to build a diversified portfolio that includes safer assets), and you also need to have the time find, negotiate and execute a large number of offline investments. If you have that much capital and time available, you might not need In Crowd Equity (although we can still provide you with access to startups you might not otherwise find and more efficient investing). For everyone else, though, In Crowd Equity gives you the chance to invest small amounts of money through a streamlined, online process, which means that we’re the one way to participate in the benefits of startup investing without having both a fortune and tons of time to spare.

Is In Crowd Equity an angel network?
No. Angel networks introduce investors and entrepreneurs but tend not to get closely involved in the investment process – it’s up to each investor and each entrepreneur to negotiate a deal individually and get lawyers to draft up the necessary contracts. In Crowd Equity is a full investment platform, allowing investors to invest capital in startups directly through the platform.

Is In Crowd Equity a fund?
No. When an investor invests in a startup through In Crowd Equity, he or she invests in solely in the single startup chosen. However, we occasionally make available campaigns for individual ‘funds’ looking to raise investment for a pool of known or to-be-selected startups (for an accelerator cohort, for example).

Is In Crowd Equity like peer-to-peer lending?

There are similarities but also important differences. The concept of having many people provide finance in small quantities via the Internet was pioneered by peer- to-peer lending platforms like Zopa, Funding Circle and Kiva, and our founders were inspired by those models when creating In Crowd Equity.

However, there are two major distinctions between peer-to-peer lending and In Crowd Equity. First, In Crowd Equitys is about seed finance – investing capital in startups – whereas most peer-to-peer lending sites focus on personal finance or later-stage businesses. And second, In Crowd Equity is about equity investment rather than debt, which means that investors who use In Crowd Equity can achieve much higher returns than they would in peer-to-peer lending, but they also bear the risks of the business and won’t get their original investment back if the business fails.

Is In Crowd Equity a form of crowdfunding?
Yes. Crowdfunding is a broad term that has come to be used for a wide-range of financing techniques, including charitable and political donations, art patronage and entrepreneurial finance. Most forms of crowdfunding have not provided funders with a potential for financial return: they usually rely on altruistic giving or non-monetary rewards. In Crowd Equity is one of the only platforms in the world that allows people to back businesses by investing, rather than donating, and therefore receive genuine financial returns when their investments are successful.

 

Risks

Are startups a safe investment?
No. The equity of a startup is considered a high risk investment, and in most cases none of your money will be returned. The goal with this type of investing is to invest in one or several startups that perform so well that they more than compensate for the ones that don’t work out. But as there’s no guarantee that you’ll pick one of the big winners, you should only invest money you can afford to lose.

Is there a chance I could lose more than I invested?
None whatsoever. As an equity investor, your liability will be limited to the amount you invested, which means that even though you might not get your investment back, you can’t be called on to pay anything more no matter what happens to the business.

What are the main risks of investing in startups?
There are three key risks when investing in a startup. The first is simply that the business will fail, and you won’t get any of your money back. But even if the business succeeds, your investment is likely to be illiquid for a substantial period of time – often a number of years – meaning that you are unlikely to be able to sell the investment, and you probably will not receive dividends from it either. Finally, there is the risk of dilution: if the startup raises more capital later on (which most successful startups need to do), the percentage of equity you hold in it will decrease relative to what you originally had. See our Risk Warning (http://incrowdequity.com/risk-warnings) for additional details on these risks.

Should I invest all of my money in startups?

Absolutely not. We strongly recommend that you invest most of your capital in safer, more liquid assets, such as mutual funds, bonds and bank deposits. As a rule of thumb, active angel investors tend to invest no more than between 5% and 15% of their capital in startups. Whatever proportion of your money you choose to invest, the most important thing is that you can afford to lose all of it.

Of the money I invest in startups, should I invest most of it in one business or small amounts in multiple businesses?
We think that the better practice is to invest small amounts in multiple startups. Because the distribution of returns from startups is highly skewed – meaning that the majority of startups fail, and most of the profits come from a few big successes – you are more likely to make a profit by investing in a number of startups in the hopes that the successes of a few outweigh the losses of the rest.

 

Fees

What fees will you charge me for investing in startups through In Crowd Equity?
The only fee we will charge you is 7.5% of the profits you make off of any investment. This means that you will not pay us anything in order to join as a Seedrs member, browse startups or make investments, and you won’t pay us anything when you receive less money back from your investment than the amount you invested. You just share a bit of the upside with us, which means our incentive is to see you make money off your investments.

Do you charge entrepreneurs a fee for raising capital through In Crowd Equity?
Yes. We charge startups a fee of 7.5% of the money they successfully raise through In Crowd Equity. This means that we do not charge startups a fee to seek capital. We feel that so-called “pay-to-pitch” models deter many great entrepreneurs because they risk losing money even if they don’t get investment. Our fee model ensures that entrepreneurs only have to pay us if they raise money through us, and we think this is important to attracting high-potential startups.

 

Entrepreneurs

Raising Capital for Startups

Why might I need capital for my startup?
Many entrepreneurs need just a little bit of money to turn their idea into the beginnings of an actual business that can reach out to customers and later-stage investors. Depending on the business, this money – known as seed capital – might allow you to build a minimum viable product if you’re a technology startup, buy equipment if you’re a manufacturing startup, lease space and acquire inventory if you’re a retailing startup, and so forth. Every startup is different, but as the costs of starting a business have come down drastically due to the Internet and other technological innovations, an increasing number of entrepreneurs find that a little bit of seed capital – often £150,000 or less – can get them a long way.

What types of seed capital can I raise?
There are broadly two types of capital available to any business: debt and equity.
Debt is a contract between you and a lender: you’re required to pay the loan back on agreed terms – such as in a specified time period and with a certain amount of interest – and if you fail to pay, the lender can sue you or force you into bankruptcy.
By contrast, equity is an ownership interest purchased by an investor: the investor shares the risks and rewards of the business with you proportionate to the size of the ownership interest, which means that if the business is successful you both participate in the upside (either through appreciation in share price or dividends, or both), while if the business fails you both walk away and move to new opportunities.

Should I raise debt or equity seed capital?

We think that equity is a much better option than debt for startups, because equity creates a greater alignment of interests between the funder and the entrepreneur.

Startups, by their nature, tend to involve a lot of risk and a high likelihood of failure. If you raise debt capital and your business doesn’t work out, the lender can still insist on being repaid – which in many cases means you have to pay them back personally or else declare bankruptcy. And even if the business goes well, lenders usually want you to start repaying them very quickly, so you’re forced to take cash out of the business that you could be using to expand.

Equity, meanwhile, allows you and your investors to share the risk of the business, so you don’t wind up personally ruined if the business fails, and it’s in the investors interest to see you grow the business rather than pay out cash quickly. Once your business has grown and become less risky, you may find debt is a useful option to finance expansion or working capital needs, but when you’re raising seed capital we feel that equity is the way to go (that’s why we built a platform for investing equity!).

Who can I raise equity seed capital from?

Some entrepreneurs start with lots of spare savings or the proverbial rich uncle, but for those who don’t your options are actually pretty limited. Venture capitalists are the main institutional investors in early-stage businesses, but only a very few of them invest true seed capital: most want to see some progress in the business first, so when you’re still at seed-stage they’re off-limits.

Some very wealthy individuals known as angel investors do invest seed capital, but it’s actually a pretty small proportion of the angel community (a recent study showed that only 2%-3% of angel investments in the UK are seed investments), and finding an angel who not only does seed investment but happens to be interested in your particular area of business can be like finding a needle in a haystack.

As a result, many entrepreneurs get stuck in a paradox, where they can’t raise money to build their business but they can’t build their business without money, and it’s because of this that many great entrepreneurial ideas never get off the ground. That’s where In Crowd Equity comes in.

 

Seeking Investment Through In Crowd Equity

How do I use In Crowd Equity to raise capital for my startup?
In Crowd Equity allows you to raise equity capital from friends, family, members of your community and the crowds, all directly through our website. You can create a campaign for your startup at anytime – your pitch will consist of answers to questions about your idea, market and team, as well as how much money you are seeking to raise in exchange for how much equity. You can also upload a short video pitch and engaging photos. Once live, investors will be able to view your campaign, and if they like what they see they can invest in you directly through the website.

Who are the investors who use In Crowd Equity?
In Crowd Equity was established to allow sophisticated people who don’t have both vast fortunes and tremendous amounts of time to build a diversified portfolio of investments in startups. Our target investors include active professionals, business owners and managers, academics and similar types of people who don’t have both the capital and time required to be a traditional angel investor.

How do investors find out about In Crowd Equity?

We market In Crowd Equity to investors using PR, social media, conferences and other tools to communicate the benefits of investing in startups.

We also encourage entrepreneurs to tell their friends, family and members of their community about their campaigns. People are far more likely to invest in startups run by entrepreneurs they know. While campaigns usually get some investment from people who find them on the site, they usually get much more from people they send the campaign to directly.

Will In Crowd Equity vet my startup before I can seek capital?

Yes. In Crowd Equity reviews all of the information that you provide when you create your campaign, and we ask you to submit evidence to support factual statements. The In Crowd Equity review process ensures the campaign is fair, clear and not misleading.

We will only post the pitch for investors to see if we conclude that the information you’ve provided is fair, clear and not misleading (and even then, we won’t post the listing if we think you’re doing something illegal, unethical or un-viable).

Will In Crowd Equity advise investors to invest in my startup?

No. While we confirm and approve all the information provided by each startup, we do not make our own judgement about whether it’s a good business. We believe that when it comes to startups, a large number of small investors are better suited to assess the business’s prospects than a few professional managers.

Is there a maximum amount of seed capital I can raise through In Crowd Equity?

The most that you can raise is generally £150,000. In certain cases, however, if we believe that investor demand is likely to be substantial enough, you may seek to raise more than that; if you would like to do so, please email us at support@seedrs.com to discuss.

How much equity should I offer in exchange for the investment?

You get to decide how much equity you want to offer, and investors can take it or leave it.
As general guidance, we’ve found that for an investment of £100,000, between 20% and 40% of your company’s equity is what investors are likely to expect. The average equity offered by startups on Seedrs is in the 10% to 50% range.

Every business is different, and you will need to choose the percentage that you think is most likely to incentivise investors to invest in your business.

Is there a minimum or a maximum that an investor can invest in my campaign through In Crowd Equity?

The minimum an investor can invest is £10. The maximum he or she can invest is however much money your startup is seeking (less anything that’s already been committed by other investors).

“The most common objection I have heard over the years to building a minimum viable product is fear of competitors – especially large established companies – stealing a startup’s idea. If only it were so easy to have a good idea stolen! Part of the special challenge of being a startup is the near impossibility of having your idea, company or product be noticed by anyone, let alone a competitor. In fact, I have often given entrepreneurs fearful of this issue the following assignment: take one of your ideas, find the name of the relevant product manager at an established company who has responsibility for that area, and try to get them to steal your idea. Call them up, write them a memo, send them a press release – go ahead, try it! The truth is that most managers in most companies are already overwhelmed with good ideas.Their challenge lies in prioritisation and execution, and it is those challenges that gives a startup hope of surviving. If a competitor can out-execute a startup once the idea is known, the startup is doomed anyway…”

What if I don't receive all the money I'm seeking?
In Crowd Equity operates on an all-or-nothing basis, which means that if you don’t raise everything you won’t receive anything. Your campaign will be active for two months, and if insufficient investment has been raised by the time the pitch expires, investors will have their money refunded in full. However, you’re free to try again by creating a new one at anytime.

Once I've received all the money I'm seeking, will the investment in my startup definitely be completed?
No. Once all the money has been invested, we need to conduct a legal due diligence process on the business and enter into a subscription agreement with you before the investment is completed. In most cases this should be a quick and painless process, and once it’s done we’ll transfer you the money in exchange for your shares. If we identify problems in the legal due diligence process or are unable to agree legal terms, the process may get drawn out, and ultimately we retain the discretion to cancel the investment and return investors’ money.

 

Eligibility to Use In Crowd Equity

Who is eligible to join In Crowd Equity?
Anyone who is 18 or older may become a In Crowd Equity member.

Can all In Crowd Equitys members seek to raise capital through the platform?
Yes.

Can I seek capital through In Crowd Equity for any type of startup?
Yes, provided that you’re not doing anything illegal, unethical or just plain nuts. However, we do not approve every startup that submits a campaign to us, and our decision as to whether or not to approve you is based on a number of factors, including our judgment about whether your campaign is likely to be of interest to investors.

What if I have potential investors from outside of Europe?

We may be able to authorise a small number of investors (usually no more than 10) who live in a country outside of Europe to invest in your particular campaign if they have a sufficiently strong connection with you. The connection should be pre- existing and the investor should be someone that you know personally, for example a friend, family, co-worker or business contact.

These investors will be authorised on a case by case basis. Simply ask the investor to sign up as a In Crowd Equity member and then letting us know the email address that they used to sign up and the nature of your prior connection.

Can all In Crowd Equity members make investments?
No. In order to make investments, an investor must either complete a short questionnaire to demonstrate to us that he or she understands the risks and considerations involved in these types of investments, or else an investor can self- certify as a “high-net-worth individual” (or for institutions, a “high-net-worth company, unincorporated association, etc.”) or a “sophisticated investor.” In addition, for now members must be resident in a European country (EU/EEA/CH) in order to invest.

 

Legal Structure

What type of equity will my startup need to issue?
The startup will be asked to issue ordinary shares. These are the same type of shares that you, your co-founders and other early investors will usually have.

Will my startup issue the shares directly to the investors?
No. You will issue the shares to us as nominee of the investors. This is a common way of holding shares on behalf of large numbers of investors, and it means that we are the sole legal shareholder for you to deal with on administrative matters, such as casting votes and issuing consents.

Why does In Crowd Equity use this nominee structure?
The nominee structure allows us to manage the investment for investors while still giving them an economic interest in your business. If the investors held your shares directly, you would have to deal with the administrative burdens of having a significant number of geographically-dispersed shareholders, and in turn each of them would have to deal with the various obligations and hassles of being a legal shareholder. The nominee structure means you only have to face one legal shareholder – us – just as you would a venture capital firm or angel, and the investors don’t have to worry about day-to-day management of their shareholdings.

What approach will In Crowd Equity take to managing the investment as nominee?
We think that at a startup’s earliest stages, it makes most sense for shareholders not to breathe down management’s necks and instead to let you get on with growing your business. In our subscription agreement, there will be a few requirements and provisions in order to protect the investors, but we won’t ask for a board seat or otherwise interfere in day-to-day management.

Will investments in my startup be eligible for EIS or SEIS tax relief?
Potentially. When you create your listing, you will complete a questionnaire that allows us to evaluate whether you may be eligible for the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).
If we determine that you are eligible, we will note that on your listing, and then we will work with you to file the necessary paperwork with HMRC. Both EIS and, especially, SEIS, provide significant tax reliefs to investors, so if you are eligible, many investors will be more likely to invest in your business. But you’re welcome on the platform even if you’re not eligible, and you’re also welcome to opt out.

 

Post-Fundraising Process

In addition to capital, I need mentorship and support for my startup. Does In Crowd Equity provide this?
Yes. The main form of mentorship and support you will get will be from your investors. We find that often the most useful thing for a startup (other than capital) is connecting with the right specialist, and then you can decide how and whether you want to work with him or her. Having several hundred people from a range of backgrounds, all of whom have a vested interest in the success of your business, is likely to be very valuable to you – and somewhere in that crowd there is likely to be someone who can help you with what you need when you need it (as well as lots of people who can test your product and act as early-adopters and mavens). Additionally, we will be very happy to introduce you to our extensive network of mentors, advisers, vendors and later-stage investors.

Will you keep the investors informed about how my business is progressing?
Yes. We’ll pass along to the investors updates you send us, media links and other information, all of which they’ll be able to access all this information through the “My Investments” section of the website.

What will my startup be allowed use the money we raise for?
When you create your listing, you’ll be given the opportunity to disclose what you intend to use the investment for. But we recognise that startups need to be flexible, and if it turns out that you find a better way to use the money to grow your business, you’ll be largely free to do so.

How do investors make money off their investment?
The main way investors can make money of their investment is if they sell the shares they own. This is most likely to happen if your business is bought by another company or floats on a stock exchange. The investor may also sell his or her shares to a private buyer, but that buyer will need to be (or become) a In Crowd Equity member and enter into a nominee arrangement with us, just as the initial investor did. In addition, investors will receive any dividend your startup pays on his or her shares.

 

In Crowd Equity in Context

Why do I need In Crowd Equity to raise capital for my startup?
In Crowd Equity is the easiest way for you to access the capital of people who want to invest in startups but do not have both the money and time to be traditional angel investors. This could include many of your friends, family and members of your community, along with other people across the country who are interested what you’re doing and want to share in your success. Due to transaction costs and other considerations, it is very difficult to raise capital from these people on your own, while In Crowd Equity makes it a straightforward and simple process for you.

Is In Crowd Equity an angel network?
No. Angel networks introduce investors and entrepreneurs but tend not to get closely involved in the investment process—it’s up to each investor and each entrepreneur to negotiate a deal individually and get lawyers to draft up the necessary contracts. In Crowd Equity is a full investment platform, allowing investors to invest capital in startups directly through the platform.

Is In Crowd Equity a fund?

In Crowd Equity itself is not a fund. In a fund, each investors’ investment would be pooled into several different companies. When an investor invests in a startup through Seedrs, he or she invests solely in the startup chosen.

Sometimes a fund will create a campaign and list themselves on In Crowd Equity to raise investment. The structure of these funds varies and is explained in each campaign listing.

Is In Crowd Equity like peer-to-peer lending?
There are similarities but also important differences. The concept of having many people provide finance in small quantities via the Internet was pioneered by peer- to-peer lending platforms like Zopa, Funding Circle and Kiva, and our founders were inspired by those models when creating In Crowd Equity. However, there are two major distinctions between peer-to-peer lending and In Crowd Equity. First, In Crowd Equity is about entrepreneurial finance – investing capital in startups – whereas most peer- to-peer lending sites focus on personal finance or later-stage businesses. And second, In Crowd Equity is about equity investment rather than debt, which means that investors who use In Crowd Equity can achieve much higher returns than they would in peer-to-peer lending, but they also bear the risks of the business and won’t get their original investment back if the business fails.

 

Risks

What is the downside to raising equity capital through In Crowd Equity?
Anytime you raise equity capital, including through In Crowd Equity, the one drawback is that if your business is successful you’ll need to share some of that success with your investors. This may mean seeking an exit opportunity, such as a sale of the company or flotation, at some point, or else it could mean paying some of your profits out in dividends. Most entrepreneurs are happy to accept this trade-off, as in practice it usually means that they get a slightly smaller piece of a much larger pie. But if you’re really determined to keep ownership of 100% of your business, then you should look for other ways to finance it.

If my startup fails, is there any chance I can be personally liable to the investors?
Not so long as you act honestly and put genuine efforts into the business. Equity investment is about risk-sharing, so if you try to make the business succeed and it just doesn’t work out, everyone simply walks away. However, if you use the investment you receive dishonestly or simply spend the money down without actually trying to make the business work, that’s a different story – on behalf of the investors, we will seek damages from you personally, and if we believe your behaviour amounts to fraud, we will consider pressing criminal charges. So, assuming you’re among the 99.9% of entrepreneurs who we believe are well- intentioned people trying to create great businesses, you have nothing to worry about, but if you’re thinking about pulling a scam or just not bothering to work on your business, then for your own sake we’d suggest that you not use Seedrs.

Will I still have control of my business if I raise equity capital through In Crowd Equity?

Accepting external investment into your company (from any source) always comes with certain responsibilities. But you are still in control of your business on a day-to-day basis.

So long as you retain over 50% of your business’s equity, you will keep control of it. For this reason, we suggest that you do not offer more than 50% of your business’s equity in exchange for the money you raise through In Crowd Equity.

Will potential later-stage investors be bothered that I have so many investors in my business?
They shouldn’t, because we act as the sole shareholder. Venture capitalists and other later-stage investors often don’t like to invest in businesses with lots of geographically-scattered small shareholders, as it can make the logistics of investing – and exiting – very complicated. But in your case, there will just be one legal shareholder, us, who can sign documents and handle other logistics quickly and effectively, and that is the ideal scenario from most later-stage investors’ point of view. Meanwhile, the fact that you have so many investors acting as supporters of your business is likely to be very appealing to later-stage investors.

 

Fees

What fees will you charge me for raising capital through In Crowd Equity?
The only fee we will charge you is 7.5% of the money you successfully raise through In Crowd Equity. This means that we do not charge you anything unless you raise money – we don’t believe in “pay-to-pitch.” We also do not charge you legal fees, and because we use largely standardised documents, you may not even need to hire lawyers yourself.

Do you charge investors a fee for investing in startups through In Crowd Equity?
Yes. We charge investors 7.5% of the profit they make on any investment. This helps ensure that, just like you and your investors, we’re incentivised to see your business succeed.

 

 

 

 

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