When you crowdfund, you are selling an investment opportunity to investors. They're like shoppers looking for a good deal. So, to make your offering attractive, it needs to reflect a return on investment that properly reflects the risk. We'll help you decide what to offer investors. The Wunderfund standard offering templates are designed for all types of businesses.
Debt is simply a loan you’re obtaining from investors with the promise to pay them back with a return. We have two types of debt offerings for investors:
A loan is designed for businesses with predictable revenues, positive cash flow, and relatively straightforward business models. Just like a typical loan, it features an interest rate, which you can adjust up or down, but is typically set at the market rate (or what the bank might charge).
While generally considered an investment with less risk than equities, or other similar instruments, debt instruments still have many risks involved, including:
Default Risk - Defaults occur when a company fails to pay an interest or principal payment to a debt holder as scheduled and as specified in the legal agreements
Liquidity Risk - Liquidity refers to the investor’s ability to sell a debt instrument quickly and at an efficient price. Debt instruments issued via Crowdfunding exceptions are generally restricted from resale and, therefore, are considered illiquid.
Company and Industry “Event” Risk – This risk encompasses a variety of pitfalls that can affect an issuer’s ability to repay its debt obligations on time. These include poor management, changes in management, failure to anticipate shifts in the issuer’s markets, rising costs of raw materials, regulations and new competition. Events that adversely affect a whole industry can have a blanket effect on the debt instruments of its members.
We've designed the SAFE in a way that keeps the investor cap table clean, and allows your crowdfunding efforts to dovetail cleanly into venture capital rounds of financing.
The SAFE is different from a convertible note, which is a debt obligation to investors intended to convert to equity within the maturity period. Many entrepreneurs opt for the SAFE, because the limited maturity period of a convertible note requires them to raise another round of capital before that period is up, and it's too hard to predict when you'll need another round.
It is important to understand the terms of any SAFE in which you are. Here are some things to keep in mind:
The most important thing to realize about SAFEs is that the investor is not getting an equity stake in return. SAFEs are not common stock. A SAFE is an agreement to provide a future equity stake based on the amount invested if—and only if—a triggering event occurs.
SAFEs may only convert to equity if certain triggering events occur. Because SAFEs convert to actual equity in the future based on some future event, it is important to understand what exactly triggers the conversion of the SAFE. The terms of the SAFE may have it trigger in many different scenarios that may—or may not—occur in the future with respect to the issuer.
Depending on its terms, a SAFE may not be triggered. Despite the identified triggers for conversion of the SAFE, there may be scenarios in which the triggers are not activated and the SAFE is not converted, leaving the investor with nothing.
There is nothing standard or simple about a SAFE. Various terms from the triggering events to the conversion price are subject to different treatment by different companies offering SAFEs. It is important to be clear with all disclosure regarding the SAFE being offered as well as the terms set forth in the actual agreement.
For information about the SEC’s guidance in regards to SAFE investments, please see this website.
Raising funds through the sale of a digital currency requires more than just building a blockchain: investors want to know what they are getting into and that the currency will be viable, and they will be legally protected. Companies on our platform need to be compliant with regulatory laws.
A SAFT is different from a Simple Agreement for Future Equity (SAFE), which allows investors who put cash into a startup to convert that stake into equity at a later date.
When a company sells an investor a SAFT, it is accepting funds from that investor in exchange for a future token to be used on the network they are developing. Thus, investors receive documentation indicating that, in the event that a cryptocurrency or other product is created, the investment will convert into a functional tokens.
Developers use funds from the sale of SAFT to develop the technology required to create a functional token, and then once the cryptocurrency market is launched, provide these tokens to investors with the expectation that there will be a market to sell these tokens to.
It is important to understand the terms of any SAFT in which you are offering and to disclose the risks associated with it:
SAFTs may only issue tokens if the actual cryptocurrency is developed and market is launched. Because SAFTs convert to functional tokens, it is important to understand the viability of that future market.
If the company is unable to launch the cryptocurrency market, as well as other risks associated with starting a new venture, the SAFT may not issue tokens and it could leave the investor with nothing.
Because a SAFT is a non-debt financial instrument, investors who purchase a SAFT face the possibility that they will lose their money and have no recourse if the venture fails.
There is nothing standard or simple about a SAFT. Various terms from the triggering events to convert to tokens are subject to different treatment by different companies offering the SAFT. It is important to be clear with all disclosure regarding the SAFT being offered as well as the terms set forth in the actual agreement.
The speed at which cryptocurrencies have grown has far outpaced the speed at which regulators have addressed legal issues. It wasn’t until 2017 that the Securities and Exchange Commission (SEC) provided substantial guidance on when the sale of an initial coin offering (ICO) or other tokens would be considered the same as the sale of a security.
One of the most important regulatory hurdles that a new crypto venture must pass is the Howey Test. This was created by the U.S. Supreme Court in 1946 in its ruling on Securities and Exchange Commission v. W. J. Howey Co., and is used to determine whether a transaction is considered a security.
For information about the SEC’s guidance in regards to ICO investments, please visit this website.
Equity is an offering type where you give a percentage of the company to investors in exchange for their investment. The actual percentage of the company you plan to give away to investors is typically calculated as the Amount Invested over the total of the Pre-money Valuation and the Raise Amount. For example:
$10,000 Invested / ($750,000 Pre-money Valuation + $250,000 Raise Amount) = 1% Equity
It may be a straightforward calculation for companies who know their pre-money valuation, but since this is often times unknown for early-stage high-growth companies, many prefer to offer the SAFE above.
Sometimes, it could be to your advantage to provide a an offering that offers either equity or debt separated by a minimum investment amount. Since Crowdfunding tends to attract smaller investment amounts on average, some issuers offer debt for investors who fall below a threshold, but then offer equity to investors who surpass a certain threshold (e.g. $10K). This also keeps the number of investors on the cap table (i.e. the document that tracks who owns a part of your business) down to a manageable few. Importantly, you need to consider the same factors set for equity offerings or debt offerings described above.
Oftentimes traditional crowdfunding campaigns give away bonus perks in the form of credits, discounts, or giveaways in products or services. On the Wunderfund, we encourage you to combine bonus perks to your offering for investors.
Perks can be as creative as you like and usually have a unique tie to your goods or services. They can be special products, discount cards, and even private access to special events. Note, if you offer a perk you must carry through and honor the credit or discount, because it’s a condition of the investment.
It is important to remember that all perks offered must comply with the Regulation Crowdfunding Rules which can be accessed HERE.