“To avoid screwing up your cap table, don’t worry about the number of investors and certainly don’t avoid Crowdfunding. Instead, focus on what matters: the kinds of securities you issue and the rights you give investors” writes Mark Roderick in his Crowdfunding & FinTech Law Blog.
Investment crowdfunding has been around for a few years now and many companies have successfully raised money from the crowd. But there’s a widely believed fallacy that crowdfunding somehow ruins a company’s cap table. A cap table, or capitalization table, is basically a table which lists each type of equity ownership. Typically used by private companies or real estate developers to provide information on their investors, a cap table is an essential tool for financial decisions involving equity ownership, market capitalization and market value.
So, why would crowdfunding have an adverse effect on a cap table? The answer is it doesn’t.
Large companies with hundreds of thousands of investors don’t seem to have any problems managing their cap tables. Not only do spreadsheets allow for over one million entries but technological advances have made it just as easy to issue documents to one investor as to thousands. And if that all sounds too hard there are digital tools available and even fund managers who can help.
The fallacy seems to have come from crowdfunding naysayers, such as venture capital and organized angel investors, who have much influence in the industry. Even the Securities and Exchange Commission (SEC) has been influenced and is adding to the Regulation Crowdfunding regulations, to permit Special Purpose Vehicles (SPV). When an SPV is used, investors invest into the SPV, shunting them off to the side. The SPV then makes one investment into the company, a roundabout way of keeping small investors “off” the CAP table.
Problems arise not from crowdfunding itself but from the terms of the securities issued to investors. For example, voting rights or selling options given to early investors which might inhibit or even preclude the company from raising money in the future.
“How many companies have stayed away from Crowdfunding and the capital it can provide based on a fallacy?” says Mark, “Way too many, that’s for sure.”
Read the original article here.
Image by Small Change