New Funding Models Emerge with Equity Crowdfunding

In the traditional world of early-stage investing, there are really only two types of securities offered:

  1. Preferred equity – This is a “priced round” where the company’s valuation is set at a specific amount. For example, a seed-stage company may raise $1 million at a $4 million “pre-money valuation” for a “post-money valuation” of $5 million.
  1. Convertible debt – This type of security will convert into shares at a later date. Conversion is usually triggered by another round of financing. Often, there is a “cap” on the note. The cap is the highest valuation your shares will convert at. For example, a company might offer a $1 million convertible note with a “cap” of $10 million. Even if it raises money at a $50 million valuation in its next round, your shares convert as if the company was valued at $10 million. Click here for a more detailed explanation.

There are a few other deal types you’ll see from time to time, but those two make up the bulk of early-stage capital formation.

Now, with the launch of equity crowdfunding, promising new funding models are emerging.

Customer Rewards + Equity

The most common model so far is one that makes perfect sense for equity crowdfunding.

The premise is simple: Offer your investors discounts on your products. Said another way: Offer your customers the chance to become investors and give them discounts for their support.

The lines between investor and customer are getting blurred, and this concept has massive potential.

Let’s look at an example in a live deal.

SlingFin makes rugged tents for outdoor enthusiasts. It’s currently raising money on Wefunder.

The product is gorgeous. Take a look:

slingfin tent - red and white

slingfin tent - orange

slingfin tent case

SlingFin’s founders are experienced entrepreneurs, having previously built Mountain Hardwear (acquired by Columbia Sportswear for $36 million).

The SlingFin tent uses a new type of structure called the WebTruss, a patented invention by founder Martin Zemitis. It’s a unique way to pitch a tent, and the design is much stronger than a traditional poles-and-stakes camping tent, as this video demonstrates. The company claims it’s the only tent to survive a night on the summit of Mt. Everest.

The current round values the company at a reasonable $2.5 million. As an added benefit, SlingFin is offering tiered “perks” to investors:

  • Invest $100: Get a T-shirt and, if you’re in the Bay Area, a tour of its office.
  • Invest $250: Get 30% off SlingFin products (excluding expedition tents).
  • Invest $1,000: Get 40% off SlingFin products (25% off expedition tents).

The perks continue all the way up to $25,000, which will get you shares, plus a guided trip to a Mt. Everest base camp.

The potential with these kinds of deals is limited only by one’s creativity.

As regular readers know, a big reason I’m a believer in ECF is that it allows startups to turn their customers into investors. And vice versa.

The positive feedback loops created here are unlike anything the U.S. market has ever seen. There’s never been such a mechanism; one that uniquely aligns interests between small business and their customers/investors.

Note that I said unlike anything “the U.S. market has ever seen.” That’s because in places like the U.K., this is already a proven model.

I’ve pointed to the example of BrewDog a number of times before. And the case it makes just keeps getting stronger.

Five years ago, BrewDog was a small craft brewer in Scotland. It has now completed four rounds of equity crowdfunding from more than 46,000 investors, which it used to accelerate its business in an unprecedented way.

Like we’re starting to see in U.S. deals, BrewDog’s equity crowdfunding offered investors/customers a blend of shares and discounts on beer.

Revenue at the scrappy brewer rose 131% last year, and profits nearly tripled. Now the company is eyeing a major U.S. expansion and has broke ground on a Columbus, Ohio, brewery that will be capable of producing 1 million barrels a year. It’s also launching a craft spirits line and owns a portfolio of 44 pubs throughout the U.K.

It’s a taste of what’s to come in the U.S.

Equity crowdfunding is a new animal. It will take the broader U.S. market a while to catch up to its potential.

In the meantime, there are some excellent opportunities out there for early adopters. And more are appearing every day. So get out there and start looking at some deals! If you missed last week’s article, where I highlighted the top four crowdfunding portals I’m watching, that’s a great place to start.

Have a great weekend, everyone.

Adam Sharp
Founder, Early Investing