Important Distinction in Crowdfunding Methods

It is important to understand when considering crowdfunding your business, that there are two very different means of raising the money. 

One is the existing method of pre-selling a product--taking paid orders for future delivery--and then using that money to fund your business and deliver the product.  This method has been around for years but has more recently gained greatly in popularity.  If you raise money in this manner, you are not selling equity (stock or membership units), the buyers are not investors in your business, and you are not subject to SEC and state securities laws.

However, the JOBS Act of 2012 allows for companies to raise up to $1 million per year through crowdfunding sites via equity investments.  This will be allowed once the SEC finalizes rules governing the process.  (See my post of October 24 for more details.)

Crowdfunding your business by selling equity will have far-reaching implications, and you should very carefully consider whether to do this.  The risks stem from the fact that you may end up with a large number of small investors, each of whom can become a pain in your side at a minimum and who have the right to sue you at a maximum.  Also, savvy future investors such as angels and VCs usually do not want to have to deal with a large number of co-owners of businesses in which they are invested.

Like almost every other decision, the decision whether to raise equity by crowdfunding is not a simple one.

My book Mastering Technology Commercialization has a long chapter on financing your business and will give you far more information to help you in your decision.