SuperCrowdHour: Six Crowdfund Investment Types You Must Understand to Invest Like a Pro
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Today, at the 1:00 Eastern SuperCrowdHour webinar, I’ll be sharing “Six Crowdfund Investment Types You Must Understand to Invest Like a Pro.” You can watch it right here in the YouTube player above.
Watch on YouTube, Facebook or LinkedIn to make comments that show up on TV or to ask questions. Replays will be available in the player above or at the social media links. You can also watch live via e360tv by downloading the e360tv app to your Roku, Apple TV or Amazon Fire TV device. At 1:00 pm Eastern, the SuperCrowdHour show will be prominently displayed.
Six Investment Types
Investment Crowdfunding offers a variety of financial instruments that allow you to support impactful businesses while potentially earning a return. Today’s SuperCrowdHour breaks down six common types of securities available in the regulated investment crowdfunding space, highlighting their features, risks, and benefits.
Debt vs. Equity: A Fundamental Difference
Crowdfunding investments generally fall into two categories: debt and equity. Debt represents a legal obligation for the company to repay the investor with interest, often on a fixed schedule. In contrast, equity gives the investor ownership in the company, offering the potential for future profits if the company grows in value but typically without guaranteed repayment.
Debt Securities
Debt instruments are popular in crowdfunding because they provide clear terms and repayment schedules. Here are two common types:
1. Term Loans
Term loans are straightforward agreements where the company borrows a fixed amount and repays it over time with interest. In crowdfunding, these loans often range from two to five years, with interest rates between 9% and 12%. Payments are usually made monthly, and terms are clearly defined, ensuring predictability for investors.
For example, a $100 investment in a five-year loan at 10% interest might yield about $127.48 by the end of the term. While repayment rates have been strong in recent years, the lack of a Stress test during a recession means some uncertainty remains.
2. Revenue-Based Financing (RBF)
RBF is a flexible form of debt where repayments are tied to a percentage of the company’s revenue. Investors receive payments until they’ve earned a predetermined multiple of their original investment—typically 1.5x to 3x—within a set time frame, often five to ten years.
For instance, a $100 investment in an RBF deal with a 2x multiple would aim to return $200 by the end of the term. While RBF offers higher risk than term loans due to variable repayment timing, it carries lower risk compared to equity investments, as returns begin earlier without waiting for a business sale.
Equity-Like Investments
Equity instruments often involve higher risk and longer timelines, with the potential for outsized returns. They include the following:
3. Convertible Debt
Technically a loan, convertible debt is designed to convert into equity upon certain conditions, such as a subsequent round of funding. This type of investment offers a blend of debt’s Security and equity’s upside potential.
Convertible debt often includes features like:
Interest Accrual: Interest accumulates over time, increasing the investor’s eventual stake.
Discounts and Caps: Early investors may receive shares at a discount or benefit from a cap on the company’s valuation, enhancing returns.
While promising, convertible notes require patience, as returns may take over a decade to materialize. Investors must also accept the possibility of total loss if the company fails.
4. Simple Agreement for Future Equity (SAFE)
A SAFE is a simplified version of convertible debt, eliminating interest and offering weaker claims on assets in liquidation. SAFEs typically include similar discount or cap provisions but prioritize simplicity, which benefits founders more than investors.
SAFEs are risky because they depend on a triggering event, such as a funding round, to convert into equity. If the company struggles, investors may never see a return. However, successful conversions can yield significant upside.
Traditional Equity Investments
Equity investments provide direct ownership in a company, with two primary options:
5. Preferred Stock
Preferred stock offers enhanced rights compared to common stock, such as priority in receiving proceeds during a liquidation. This priority makes preferred shares particularly appealing in scenarios where the company performs moderately well.
For example, if a company sells for $2 million, preferred shareholders who invested $3 million would likely be entitled to all the proceeds of the sale. While preferred stock can provide added protection, terms vary widely, and investors should compare them against those offered to institutional backers like venture capitalists.
6. Common Stock
Common stock is the simplest form of equity, representing proportional ownership in a company. It carries higher risk compared to preferred shareholders, as common shareholders are the last to receive proceeds in the event of liquidation or sale. However, it is also a more founder-friendly option, allowing businesses to retain flexibility and align incentives.
Companies that issue common stock often aim to keep fundraising simple or avoid raising future rounds. Investors may benefit from dividends if the company shares profits, though this is less common in early-stage businesses.
Choosing the Right Investment
Each type of crowdfunding security offers unique advantages and risks. Term loans and RBF provide predictable returns, making them more suitable for risk-averse investors. Convertible debt and SAFEs cater to those willing to take on more risk for potential outsized rewards. Preferred and common stock are ideal for investors who want direct ownership and are prepared for long-term commitment.
Investors should carefully evaluate the terms of each offering and consider their risk tolerance, time horizon, and financial goals. By understanding the nuances of these investment types, individuals can make informed decisions and support impactful ventures that align with their values.
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Upcoming SuperCrowd Event Calendar
If a location is not noted, the events below are virtual.
SuperCrowd Mastermind Group, twice monthly on the 1st and 3rd Thursdays at noon Eastern. This group is for entrepreneurs and small business owners interested in raising Money from the crowd. Attend your first meeting free!
SuperCrowdHour, November 20, 2024, at 1:00 PM Eastern. Each month, we host a value-laden webinar for aspiring impact investors or social entrepreneurs. At November’s SuperCrowdHour, Devin will explain six common investment types you need to understand before you can invest like a pro. Free to attend.
Impact Cherub Club Meeting hosted by The Super Crowd, Inc., a public benefit corporation, on December 17, 2024, at 1:00 PM Eastern. Each month, the Club meets to review new offerings for investment consideration and to conduct due diligence on previously screened deals. To join the Impact Cherub Club, become an Impact Member of the SuperCrowd.
Community Event Calendar
Successful Funding with Karl Dakin, Tuesdays at 10:00 AM ET – Click on Events
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CfPA Webinar with President-Elect Jenny Kassan sharing her vision for 2025, December 11 at 2:00 PM Eastern.
Changing the Paradigm: Mobilizing Community Investment Funds, March 7, 2025
Asheville Neighborhood Economics, date TBD following the impact of Helene.
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