Crowdfunders: Second-rate investors?

The situation is made even worse when you realise that sometimes these companies have raised VC money just months earlier, and usually on much more preferable terms.

Towards the end of last year, Stelios, founder of easyJet, crowdfunded an estate agent, easyProperty. He and his business partner sought ?1m for just a 1.5% stake in the company. This valued their pre-launch (and hence zero-revenue) business at over ?60m.

Stelios, at least, offered ordinary shares for easyProperty. Many companies crowdfunding equity offer lesser non-voting shares while institutional investors enjoy full shareholder rights, and often Board of Directors seats. Stelios raised ?1.4m from almost 400 investors in around two weeks. See what I mean about an exploding market? People are falling over themselves to invest in an estate agent!

Read more about crowdfunding:

The anatomy of what goes into crowdfunding campaigns

Business saved from going under by crowdfunding campaign

Is low awareness of alternative finance hurting SMEs?

Stelios has also raised money from institutional investors though, and as you?d expect, he isn?t disclosing the terms. Did they invest at a valuation of ?60m? Unlikely.

So, before you back another exciting new company, ask yourself if you?re getting a good deal. Does their multiple make sense? Are they over-estimating their own worth? Are wealthy investors getting a much better deal? 

It may be the people behind the campaign are taking advantage of your lack of knowledge, and using you as a source of cheap cash rather than a new business partner.

Darren Fell is CEO and co-founder of online accountant Crunch.

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