Since crowdfunding’s advent in 1997, four distinct types of crowdfunding have emerged within the industry. With very different terms and requirements, it’s necessary to understand the nuances involved with each branch of crowdfunding so as to choose the path most relevant to your goals and needs.
Rewards-based crowdfunding is the most common type of crowdfunding option available. This type of crowdfunding involves setting varying levels of rewards that correspond to pledge amounts. A standard rewards campaign offers at least three levels of pledges/rewards.
Rewards campaigns tend to work well for client-facing, tangible products who require less than $100,000 in funding and typically last for 1-3 months.
Equity crowdfunding is on the rise after the signing of the Jumpstart Our Business Startups (JOBS) Act in April of 2012. Equity crowdfunding is the exchange of actual shares in a private company for capital. In this form of crowdfunding, entrepreneurs can set investor caps, minimum pledge amounts, etc. as well as approve or deny investors who wish to view their business documents.
Equity campaigns are typically several months or longer in length and fit well with startups seeking $100,000 or more in funding.
Donation crowdfunding is exactly what it sounds like - the campaigns amass donations without being required to provide anything of value in return. This type of campaign serves social causes and charities best.
Donation campaigns are often 1-3 months in length and work well for amounts under $10,000.
Lending based crowdfunding allows entrepreneurs to raise funds in the form of loans that they will pay back to the lenders over a pre-determined timeline with a set interest rate.
Lending campaigns tend to take place over a shorter timespan of around five weeks and works well for entrepreneurs who don’t want to give up equity in their startup immediately.
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