EquityNet – An Equity Crowdfunding Platform Review
If you’re an entrepreneur with a great idea, you’re probably going to need funding at some point in time. The way it works is that you usually give away equity in your company in exchange for cold hard cash. This funding can come from a venture capital firm, a private equity firm, an angel investor, or even through crowdfunding.
What is crowdfunding? It’s where a large group of people each contributes a small amount to your business idea and the result is a large amount of money with the risk spread out among 100s or 1000s of investors. In a previous article titled “A Warning About Crowdfunding“, we discussed crowdfunding sites that allow you to “pre-buy” products in exchange for an upfront investment. We call that “project crowdfunding“. You are investing in a project and your return is in the form of a product. In many cases though, these products aren’t delivered and you lose your money.
But what about crowdfunding that allows us to buy equity in a promising startup instead of just a product? This type of crowdfunding is called “equity crowdfunding” and one of the leading players in this space is a company called EquityNet. Let’s review what EquityNet has to offer investors and entrepreneurs.
Founded in 2005, EquityNet is the original and only patented equity crowdfunding platform that has taken in just $2.1 million of funding. The platform matches qualified investors with startup companies that are looking to raise anywhere from $10 thousand to $10 million. With over 100,000 individual entrepreneurs and investors using the platform, it has managed to raise over $115 million in the past 12 months. The platform has two value propositions; one for investors and one for entrepreneurs.
EquityNet for Entrepreneurs
If you’re an entrepreneur, you can sign up to EquityNet for free and create a company profile, complete their online business plan, and show off your company to potential investors. Have a go at filling out the EquityNet detailed online business plan to see if you’re an entrepreneur or a “wantrepreneur”:
If you’ve ever performed a Google search for “online business plan templates”, then this is exactly what you were looking for. Of course, there’s no such thing as a free lunch. Want some help with that business plan? Want someone to analyze the strengths and weaknesses of that plan? These are extras that you can purchase for a nominal fee. Here’s a breakdown of what you get for free versus having a subscription:
Once you’ve put together the perfect business plan, you’ll need to purchase a subscription in order to show it off to investors and raise money. The 3-month plan costs $600 USD while the 12-month plan costs $1,200 USD. That’s a price point that any serious aspiring entrepreneur should find attractive when you consider that you’re essentially buying the input of a massive “shark tank” that can not only provide you funding but more importantly help to validate the vision you have of your business. Rest assured that people will question why your forecasted subscriptions for that hot new dating app you came up with jumped from 5,000 to 50,000 in a single month.
EquityNet for Investors
In order to participate as an investor on the EquityNet platform, you have to have an income of $200,000 ($300,000 combined) or a net worth of $1 million excluding your residence. It’s possible that everyone who checks both those boxes “yes” is telling the truth about their income or net worth, but there’s really no way to tell. Once you’ve qualified yourself by ticking some checkboxes, you’re now free to browse the 100s of companies on EquityNet and invest in them absolutely free of charge. Now here’s where we became a bit apprehensive. EquityNet actually has no involvement whatsoever in the transaction as stated below:
We are a subscription service. Investment transactions happen outside of EquityNet and we are no longer involved.
If you’re a seasoned angel investor or VC using this platform, then that’s probably not a big deal. But if you’re a retail investor, think about what that means. There is nobody who can validate that investment opportunity except you. Do you really know the party on the other end of the transaction? Have you met all the people involved? Do you understand what percentage of equity you’re purchasing and at what valuation? Have you read and fully understood all the legal documentation provided by the company when you actually make the investment? Have you checked the management team’s bios extensively to make sure they have the experience they say they have? Angel investors and VCs have this process down to a tee because they do it so many times. They can recognize all the red flags a mile away because they’ve seen them a million times. As a retail investor, are you really prepared to conduct this level of due diligence? Do you have the experience needed to choose the right people to entrust your hard earned money with?
Let’s say that instead of doing all that due diligence you decide to piggyback on the work of others. Take the below companies as an example:
Just ignore the Uganda-based ferry company for a second. Take a look at the other two companies which were both “oversubscribed” which means there was high investor interest and they were able to raise more money than they set out to. Even if you just stuck to investing in oversubscribed companies, consider this. Unless that company you crowdfunded has an IPO or is acquired, your shares are worthless. That means you cannot sell them, you cannot transfer them, you cannot do anything with them. The company you bought shares in has to have a liquidity event or otherwise you end up with a total loss. If the company decides to stay private indefinitely, you receive nothing. Think about that before you commit your funds into any single company. An angel might make 1-20 investments before one actually pays off years down the road. If you are even the slightest bit risk averse, then this isn’t the platform for you.
So here’s a quick review on what we just covered. If you’re an entrepreneur you should be all over the free business plan tools that EquityNet is offering. If you’re an angel investor or VC, there are certainly a lot of companies for you to sift through and probably some very interesting opportunities. As for retail investors, unless you’re willing to put in some serious due diligence or you just like gambling with your money, this platform is probably not for you.
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