8 More Tips for Choosing the Right Crowdfunding Platform

Shelly Hod Moyal  |

Two weeks ago, we asked the question: How does an investor determine which equity crowdfunding platform is best? By discussing deal flow quality and variety, due diligence, quality of the entrepreneurs, transparency, and co-investing, several key dimensions were identified.  In today’s article, I close the loop by discussing the importance of potential returns, deal terms, incentive structure, investor rights, tax considerations, user experience, investor education, and management of the platform.                    

  • Potential Returns – Potential returns are dictated by four things: entry valuation, subsequent rounds, expected returns, and time horizons. All of these factors influence the potential returns you will see from investments further down the line and you should evaluate each of these aspects every time you consider an investment. For example, if you are looking at a company valued today at $5m and you expect the company to be sold in five years for $100m with two subsequent rounds expected to dilute your position by 50%, this translates to a 10x return on your investment and 58% IRR. As an angel, aim to invest in opportunities that present significant upside potential expected to compensate for losses in the rest of your portfolio.

  • Deal Terms – Crowdfunding platforms vary significantly in regards to who dictates the investment terms. Consider whether it is an investor-driven platform (ie: the investor is responsible for dictating the terms and will push for better conditions) or an entrepreneur-driven platform (ie: the entrepreneur sets the terms which are usually less favorable to the investor). Alternatively, the platform may negotiate the terms on behalf of the investor. Here, there is a lower incentive to fight for terms than an investor as platforms are typically also compensated for the transaction although it is still more favorable than having the entrepreneur decide on the terms.

  • Incentive Structure – To understand the incentive structure, ask yourself: Who is the platform’s client? Or in other words, who pays the fees? If the entrepreneur pays the fees, the platform is obliged to help the company fundraise, but if the investor pays the fees, the platform is obligated to help the investor access high quality deals. Keep in mind that when the entrepreneur pays the fees, there is a higher risk of adverse selection as it could indicate the entrepreneur had difficulty raising funds elsewhere. It’s also important to understand the structure of the fees, including what portion is fixed and what is performance-based.

  • Investor Rights – One cannot underestimate the importance of using a platform committed to protecting your rights as an investor. For example, there is a considerable difference if you are investing under the same terms as other investors or buying into a separate class of shares that are subordinate and have less rights than those of other investors in the round. Look for information rights, preemption rights, board of directors seat and reverse vesting of founders. The more protections you have in place, the better your position in the company.

  • Tax Considerations – Depending on your country of residence and where in the world you are investing from, there are tax requirements and treaties that must be taken into consideration. It is important to understand the tax implications of your investment, specifically the capital gains tax rate and other taxes on distributions (dividends), as this directly influences the future return on investment.

  • User Experience – In online investments, an easy-to-use crowdfunding platform can simplify the entire process. Look for automation and portfolio management tools that will assist in each stage of the investment lifecycle and help keep track of your portfolio post investment.

  • Education – Some crowdfunding platforms go above and beyond, helping their communities grow and develop their investing portfolios. This is especially important to new investors who are just getting acquainted with the high-risk/reward profile of early stage investing.

  • Management of the Platform – Last on the list - but certainly not the least - when you invest your money in a platform, you need to trust the people behind it. A high-quality equity crowdfunding platform is one that protects you as a minority investor and provides you with the tools and quality deal flow that enable you to make effective investment decisions.

Download the whitepaper to get in-depth information about each of these considerations and to choose the crowdfunding platform that best suits your investment needs.

As Founding Partner at iAngels, an equity crowdfunding platform for Israeli high-tech start-ups, Shelly has an extensive financial and investment background. Prior to iAngels, Shelly was an Investment Banker at Goldman Sachs, a Research Analyst at Avenue Capital and a Financial Advisor at UBS. Shelly received her EMBA from Kellogg Recanati and BA (Summa Cum Laude) in Economics from Hunter College, CUNY. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.



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