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Raising finance through crowdfunding

There is a real buzz about crowdfunding at the moment and more and more entrepreneurs are seeing it as a viable way of getting their hands on much needed investment. It's a topic we often hear investors and entrepreneurs discussing at industry events, such as South West Founders. This monthly meet-up, which TLT sponsors, is aimed at connecting local entrepreneurs with other like-minded people including tech investors.

Popular crowdfunding sites such as Crowdcube and Seedrs are experiencing significant year on year growth and we are regularly seeing new platforms enter the market. 2014 was a bumper year for crowdfunding, with Seedrs closing its largest ever funding round when NearDesk - a start-up that offers touch in/touch out desk and meeting room rentals at locations across the UK – broke the £1 million mark.

Many entrepreneurs see crowdfunding as an exciting and easy way to access investment, but companies should consider the advantages and pitfalls of crowdfunding before embarking on a campaign.

Advantages:

  • Money can be raised quickly and easily.
  • Friends and family can invest in your business.
  • A company can set its own valuation (often quite high).
  • Most small investors will have no voting rights and therefore very limited control over the business.
  • Can provide PR and awareness of offering – crowd investors often publicise the business and target customers.
  • In the case of rewards based crowdfunding (eg Kickstarter), you can raise money without giving away equity.

Disadvantages:

  • Money from crowdfunding is just a cash investment – there is usually no wider support or expertise as might be obtained from business angels/VCs.
  • Confidential information is distributed widely as part of the pitch process.
  • Having hundreds of shareholders can be difficult and costly to administer, particularly on a future sale of the business (unless the platform has a nominee structure like Seedrs).
  • Future funding rounds may be more difficult - unlike VC or angel investors, crowd investors may not have financial capacity to participate in future rounds, and VC or angel investors may be uncomfortable investing alongside crowd investors.

At TLT, we have vast experience of raising finance through crowdfunding, in addition to venture capital, business angel investment and venture debt. If you would like more information on crowdfunding and other methods of fundraising do get in touch. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2015. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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