Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. Here we consider whether or not negotiation is needed. We’ll examine several more myths over the next week or two, so look for subsequent blog posts in the coming days.
Private placements and Angel groups have typically involved a back-and-forth negotiation that allowed deals to get done through discussion and creative deal making.
With hundreds of investors involved, and a national scope where investors and entrepreneurs don’t have the opportunity to meet face to face, it is nearly impossible to negotiate a deal once it has been offered and one or more investors have jumped on board. Typically all investors in an investment round will invest on the same terms with the same term sheet. The funding portals make an “offer” to sell securities at a particular price and it is up to investors to take it or leave it. The results of this kind of transaction, especially when it is not vetted by a professional investment banking or venture capital firm, is that either the entrepreneur will not receive investment or worse yet, they will receive investment, but they shouldn’t have received it at the terms offered.
The benefit of negotiation is that it gives parties a chance to test the premises upon which the valuation is based. If the valuation is too low, then the entrepreneur gives up too much equity and they may be challenged in raising further rounds which may be necessary for the survival of the company. If the valuation is too high, the investors may be pushed down in a “down round” where their equity is significantly diluted. Angel groups with experienced participants have benefited from using that experience to negotiate deals that are good for both investors and entrepreneurs alike.
Unless funding portals can find a way to crowdsource the negotiation process as well as investment, there will be many unhappy investors and entrepreneurs who are not getting what they had hoped for from the crowdfunding experience. Unfortunately, many people will not realize what has happened until several years later when things go awry.
Stay tuned for the next crowdfunding myth busting blog post on due diligence…