The Equity Crowdfunding Document
An equity crowdfunding campaign, like any offering of shares to the public requires disclosure. Set out below are some things business owners should think about before they launch the campaign. Usually an equity crowdfunding platform will suggest that you prepare a short form information memorandum (IM), essentially a more comprehensive business plan.
In the interests of helping Kiwi entrepreneurs prepare for an equity crowdfunding campaign we’ve set out some things to bear in mind when contemplating the campaign. This is by no means exhaustive!
The upfront summary
More often than not it is the Executive Summary that an investor will read first therefore it is your opportunity to capture the reader. The Executive Summary is a section which allows an investor to digest some of the company’s most important highlights and details of the raise. It’s often where an investor will decide whether to keep reading or not – it’s important.
The Executive Summary provides an overview of the business, stakeholders and industry, highlighting the most important aspects and opportunities. Crucially, it addresses the reasons for attracting investment and future growth potential. It is a good idea to write the executive summary last as it usually only contains the most relevant and significant points made in the IM.
How do I talk about my business?
The first thing to think about is clearly outlining what your business does, and a description of the activities it undertakes as part of its operations. This could include a breakdown of sales, customers, and your perceived development potential.
It’s also helpful to breakdown your corporate structure, i.e. are you a subsidiary (owned by another company), and who are your key stakeholders? This is salient information for investors, as they will obviously sit next to your current investor base.
As with financials, your history is important. This is the development of the company over time – did you go through a beta phase? How many customers did you acquire? If you’re still in beta why?
Finally, don’t forget the team. As you know with early stage ventures it’s about management. If you’re a proven entrepreneur with a previous exit, highlight this experience. It’s all about credibility for your vision.
Metrics are quantifiable measures to track the performance of a business or industry. They are helpful for comparing your business with competitors and they are a good way of understanding where the trends are heading in the industry. Not all metrics are useful, relevance is critical. Good ones to include would be indicators financial performance such as profit margins, and industry drivers.
The industry outline
Competition is key – do you have any? Why is your business unique? Often you’ll want to put together a competition table showing your business, like companies, and why you are much better!
As part of this don’t forget to highlight the regulatory nature of your industry if relevant, and any important historical milestones. This section should also include the risks associated with the business and industry.
OK, so what about the numbers?
The financials are the first place to start as assumptions made here will underpin projections in many of the other areas. Financial statements allow investors to see how you will make money and what potential your business has.
If possible, historic financials are important as they help validate the business model, and give credibility to your growth projections. Of particular importance are the assumptions used to the forecasted financial statements. Investors will sanity check these assumptions knowing that most early stage businesses are overly optimistic and forecast revenue that is too high and costs that are too low.
What are you going to achieve?
If you’re raising capital, it’s usually for a defined purpose. State these purposes clearly – do you need capital to enter a new market? Is it to increase sales or develop a new product? Obviously you’ll need to explain how much you are raising and at what reasonable valuation. Looking at similar businesses at your stage and in your sector will give you a good starting point to gauge valuation.
It is important to demonstrate that your business has a well thought out exit strategy for investors to “cash-out”. Generally investors look to exit investments in early stage businesses through an IPO or acquisition after a period of growth.
Crowdfunding providers are here to educate entrepreneurs and guide them through the capital raising process. It is ultimately the responsibility of the company raising capital to ensure these comply with the necessary requirements, however we are happy to assist companies as much as we can.