Equity crowdfunding is where a group of people invest in unlisted ventures in exchange for shares in the business. It can be a startup, or an established company. The investors get a share of equity in the business. The shares they acquire in exchange for capital allows them to have a voice in the way the particular business is run. Equity crowdfunding can be dangerous because the investors can only get returns if the business picks up and starts to make profit. It is both of great risk and great opportunities. Here’s how investors make money through crowdfunding;
1. Buyout from new Owners
As mentioned, crowdfunding is risky especially because most startups fail. Or if they grow, they grow at a low rate and an investor may not get returns for years. An investor may consider getting a return of their initial funding by cashing out through a buyout. The investor sells off his shares to another person to get back their money. This is better known as a secondary market trade. But this can only work if there is a demand in the private company’s securities in order to create a liquid and viable market for a secondary exchange.
Another way to get returns as an investor is through regular dividends issued to investors. Dividends are however rare because the funds are mostly tied up in the business. Further, the more shares are given to other investors the more your investment is diluted. The only way to make a return out of dividends is if the startup grows and enjoys many years of successful profits. In most cases startups cannot afford to issue out dividends, and if they can, it’s not usually a growth that the crowd funders were hoping on their investment. So investing is a great risk.
3. The Company going public
If the company grows and is able to float on the stock market then getting a return on your investment is possible. The company offers a certain percentage of shares to the public at a certain price per share. It can decide to sell 100,000 shares at a rate of Ksh.50 per share. The proceeds of the sale would therefore be Ksh.5, 000,000.
4. If the company is bought: Acquisition
You can also be able to get a return of your money if the company or business you initially invested in is bought by another larger company.
The crowd investors can also get a return on their money if the company decides to buy back equity from the investors. So you get a chance to sell your shares back to the company for a profit.