Offering Guide

Should I Offer Debt or Equity to Investors?

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

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:

Loan (aka Promissory Note) - Cash Flow Positive Businesses

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).

Revenue Sharing Loan - Businesses with Going Revenues

Revenue sharing loans are another type of loan, but the main difference is that you’re paying back the loan based on a share of the revenues up to a designated repayment amount. The size of each payment depends on your revenues, and could be easier to manage if your cash flows are not predictable yet. The terms are designed so you won’t have to start payments until your company begins to generate revenue.

Risks of Debt Instruments

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.

SAFE Agreement

(Simple Agreement for Future Equity)

For High Growth Companies Who Expect to Raise Future Rounds of Venture Capital Financing

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.

Equity

For High Growth Companies

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.

Mixed Offerings

Mixed Offerings of Debt and Equity

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.

Bonus Perks

Use Special Discounts, Credits & Giveaways to Sweeten the Deal for Investors

Oftentimes traditional crowdfunding campaigns give away bonus perks in the form of credits, discounts, or giveaways. This is the way that every Kickstarter campaign works. The difference of course is that here you’re attracting investors with bigger pocket books. On the Wunderfund, we encourage you to combine bonus perks to your offering to incentivize 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.

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