Types of Crowdfunding: Donation, Rewards, and Equity-Based by Emma McGowan

TL;DR - There are three primary types of crowdfunding: donation-based, rewards-based, and equity crowdfunding.

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Tags - crowdfunding, initial capital, financing, startups, investment, types of crowdfunding, donation-based crowdfunding, rewards-based crowdfunding, equity crowdfunding

Questions answered:

  • What types of crowdfunding are there?
  • What is donation-based crowdfunding?
  • What is rewards-based crowdfunding?
  • What is equity crowdfunding?

Summary:

  • Any crowdfunding that offers no financial return to the investors can be considered as donation-based crowdfunding (e.g. fundraising for disaster relief, charities, nonprofits, and medical bills).
  • Rewards-based crowdfunding offers investors a reward (typically the product or service that the company offers), but is still considered a subset of donation-based crowdfunding as there is no financial or equity return.
  • When raising crowdfunding capital, founders need to answer the audience’s questions and build their confidence in the startups/projects.
  • Every successful pitch does three things: state the problem, introduce the solution, and define the market size.
  • “Rewards” generally fall into three main categories: pre-orders (most popular, selling pre-orders of the product the company is planning to produce), services (if pre-orders are unavailable or do not fit the business model), and recognition (perfect for donations under $20).
  • Equity-based crowdfunding allows investors to become part-owners of a startup.
    • As equity owners, investors receive a financial return on their investment and ultimately a share of the profits in the form of a dividend or distribution.
  • To successfully launch an equity crowdfunding campaign, founders should put the followings together: executive summary of the company, terms of the fundraise, business plan, pitch deck, financials, and closing documents.

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