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 Are you considering raising money for your venture? Do you have an innovative idea you need some help building? Business founders have options as to how they get the money they need and pay back investors. Equity, debt, crypto, or any combination of these can be used to raise funds to help you grow your organization. I will outline some of the differences to help you identify what may be best for your needs.

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At Fund Wisdom we review innovative funding and investing platforms and the changing market dynamics that accompany them. These funding solutions are creating greater transparency and market insight on what businesses and investors are using for funding sources and how successful they are. Depending on the entrepreneur and your vision for the business, certain methods of capital will be more appropriate than others. We step through what others are using to help you assess where to go.

Below is a screenshot of our dashboard that provides a view into the financing types from our database of equity crowdfunding offerings to see the rate at which others are using each type.

2022 Reg CF Asset Types Offered

What is Equity?

Equity offerings provide business capital with no immediate need to pay back investors. Equity investments are securities that provide a stake in the company. Shareholders are rewarded through the retained earnings of the firm and have a claim on the assets of the corporation after the debt holders.

As seen from our data a few of the asset categories within equity are:

  • Common Stock
    • Non-Voting
    • Class B 
    • Class A 
  • Preferred Stock
  • Simple Agreement for Future Equity (SAFE)

We will cover SAFEs in the convertible debt section as this is a method of raising money that straddles the line between debt and equity. This has also grown in popularity.  

What is Debt?

Money raised by a founder from an investor under the condition that it is to be paid back at a later date, most of the time with additional interest on top of the initial capital provided.

Debt investments tend to be less risky than equity investments, but with lower and more consistent returns. Debt financing allows you to retain control of your business; entrepreneurs do not lose creative or strategic control of their startups. Startups may have to back up a loan with collateral, which means that if the startup defaults, it could lose certain tangible assets. Convertible debt delays the need to perform a valuation as a startup, but it still provides the investors with potential impressive returns as well as an alignment of incentives.

Debt Funding Platforms

Equity investments involve higher risk, but with higher potential rewards. With equity financing you issue shares of common stock to an investor base and the number of shares offered dictates the investor's ownership percentage. Unlike with debt financing, you do not have to consistently allocate profits to loan repayments. There is no requirement to pay back the investment if the business fails with a loan.

Convertible Debt

Convertible debt, or a convertible note, is a loan that can convert into equity. The holder of the debt can convert the notes into a specified number of shares of common stock in the issuing company or cash of equal value. It's a hybrid security with debt and equity-like features.

How do you measure a startup's value? How do you know their idea or team has potential? It's hard for startups to answer questions like that without any form of established proof. But with convertible debt, startups do not have to answer those questions right away. Convertible debt is attractive because it allows startups to delay this issue.  

Convertible debt success: 

With a goal of $600,00 on WeFunder, Camperoo reached 100% of its goal using convertible debt. Emmie Chang, CEO and Founder of Camperoo,  set out to create a company that helps  parents discover the best camps for their kids As Camperoo contunies to grow they hope to be the new marketplace for all child activities.

Emmie Chang said she used convertible debt because "documentation is relatively simple and straightforward. We could also close each investor separately in a rolling close, with some flexibility in valuation caps (which increase over time). It also reduced legal fees and time to sign."

Convertible debt is a type of security frequently used by startups when raising seed capital. Fund Wisdom can help your startup raise money through our different aggregated crowdfunding platforms. If you are an entrepreneur interesting in starting a startup using convertible debt take a look at our startup page. If you are an investor and are interested in funding startups that use convertible debt, take a look at our investor page and find the right startup for you.

What is a Cryptocurrency Security Token Offering

A Security Token Offering (STO) is a form of initial coin offering (ICO, or initial currency offering). It’s a type of funding using cryptocurrencies in a regulated fashion. In an STO, cryptocurrency is sold in the form of "tokens" or "coins" to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin, Ethereum, etc. The tokens sold are promoted as future functional units of currency and are done so following SEC-mandated rules. An ICO can be a source of capital for startup companies. Traditional paper-backed assets like equity shares or debts in a business present some transaction and liquidity issues. This type of business funding event in the form of a token can address some of these problems.

As seen from our data a few of the asset categories within equity are:

  • Token Debt Payable by Assets ("DPA")
  • SAFT (Simple Agreement for Future Tokens)

Coinlist is a platform that specializes in these offerings built from the AngelList team is a great source to find these ICO investment offerings.

Which one should you use?

The Small Business Administration (SBA) is a government backed program that can help in the process to raise capital via equity or securing loans and is a great place to start. Hopefully an understanding of the offering types and those being used helps determine where to go. Equity and debt investing platforms are lowering fees providing better rates online, lower fund management fees and transaction costs. When selecting a path to raise funds consider the type of business you are in, your current and future cash flows, profits, expansionary needs, and the creditworthiness of your founding team.

If you are considering debt financing a good place to start is with a business credit score. Supermoney and Kapitus offer up competitive rates. We have affiliate relationships with both. As businesses grow they typically employ a blend of both equity and debt financing to meet their needs. Which method of raising funds works for you? Share in the comments below.

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