Series A Crunch: Why Startups Will Use Crowdfunding Instead
forbes.com
forbes.com
I've heard from many Series A / B VCs that they will not invest in startups that have gone the equity-based crowdfunding route (that is, not the Kickstarter approach, but the new kind where equity is provided as per the new JOBS act), because they don't want to deal with hundreds of tiny investors. It's a nightmare for them.
The only way to deal with these sorts of equity-based crowdfunding platforms if you plan to go for a later stage equity investment from a VC or other investment professional is to bundle all the unaccredited / crowdfunding investors into a single LLC or other entity and have that entity invest in the startup with terms that allow future investors to treat them all as a single class in much the same way they deal with accredited angel investors now.
One of the big reasons that I chose to use Seedrs, beyond being FSA approved, was that they become a single shareholder that I deal with. That is how they are in the terms and how I issued the shares.
They hold all of the investor details (some 60 individuals who are already users of another site I run - my users are my investors) and have structured it so that the investors are buying the equity through Seedrs and Seedrs hold a record of that amount in their name. Effectively, Seedrs are a single proxy, but I never have to care about having more than 1 shareholder from a legal perspective (I do care, I speak to my investors, but that's a human angle rather than legal/accounting).
I spoke to a few VCs first who voiced concern about the number of investors being an issue. But it really depends on scale... it is an issue if you are seeking a small round in the future and have hundreds of investors. Because to resolve everything legally costs a lot of time and money. But if the round is large, then it's less of an issue anyway as mountains can be moved for large rounds (it's not ideal, but it can be done). Seedrs is appealing because this approach doesn't preclude choices in the future.
I don't know if there is a North American equivalent to what Seedrs have done, to have a single shareholder structure in a friendly format, but it's the way to go if you choose to issue equity for funding.
Q: Do startups have to deal with a million new investors?
No. The overhead is the same as adding a single large investor to the round.
All of the investors are pooled into a single fund which, in turn, invests in the startup. Only the fund is listed on the company's cap table—the individual investors are not. The fund also signs the investment documents, the individual investors do not.
Right now as it stands, Second Market is only available to accredited investors (https://angel.co/help/invest#secondmarket) and so the JOBS act crowdfunding rules don't apply here in the same way.
A couple weeks ago, we saw an HNer proposition to give $8K for a 50/50 "co-founder" seed funding-type split: http://news.ycombinator.com/item?id=5037694
There is absolutely no reason, aside from the existing regulations / barriers to entry, that this model shouldn't be applied to helping new enterprises get seed funding. The $8K / 50:50 made a great initial throwdown offer. . . but in a market setting, there should be competition; what if someone else more generous could offered $10K without requiring half the equity? One necessary element is a bidding platform, and a place for people with cash to transact with people who have ideas. More potential investors equal higher potential investments equal more opportunity for those "fundless startups" to get up and running.
It would be awesome to work on something like this (ping me -- I'd love to get back to work!): build an eBay clone, integrate Stripe to handle escrow/payments and collect a ridiculously small fraction of the economic surplus created. No need to be greedy (as per the current flaw of existing systems); this model would make investing accessible to common folks and be profitable enough as a going-concern.
People call startups an insider's game for a reason. If you're not taking VC money (or are unable to), then you really need to be prepared to forge your own path, and not become "just another startup like all the others".