Five Steps to Demystify Crowd Investing

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Previous blogs have discussed the necessity for investors to be accredited for equity and debt crowdfunding offerings. But that does not mean that as an accredited investor you have any particular experience with such matters. There are some things you should look for in advance when deciding upon an investment.

Investing in a company though crowdfunding is not terribly different than investing by traditional means. Although the typically more rapid due diligence, deal processing and digital access to pools of investment candidates do tend to favor investors in our age of cloud data and analysis. When using a crowdfunding platform like, be sure that these general items get checked off your due diligence list:

  1. Platform disclosures and security: the platform should have a tab or section for member disclosures, privacy statement, security and data integrity. Reasonable commercial means to ensure your protection should be highlighted and offer some level of comfort that your information is secured. The platform should also explain fees and relationships with partners such as attorneys, accounting firms, brokerages and other helpful agencies. Size and number of deals (typically few in this nascent industry) is less important than the fee structures and support infrastructure they offer to investors. How alone in the wilderness do they put you? How wild wild west are their operations? How do they help you along your path to decide if you want to invest your capital in one of the companies listed on their platform?
  1. Company documentation: The platform should have set up a standard way for all companies listing themselves on the site to present their (a) history and compelling story, (b) financial plan, (c) operational resources and staffing, (d) marketing and competitive analysis, and (d) pitch that outlines your benefits should you invest. Traditional business plans are overrated but there needs to be a clear stated vision, an experienced leadership team, and a plan that outlines risks and rewards. You do not have to be an expert in the profession, but the company does need to provide comfort that they are experts and have thought through all the details needed to make your investment fruitful.
  1. Subscription agreement: Your lawyer needs to be satisfied that the agreement meets federal, state, local (and your explicit investment) standards. I will write an entire blog on this section in the future, but for purposes of highlighting items be sure that the amount of the investment is clear and that the shares received for the capital are free from all encumbrances. Those shares need to be yours free and clear. If your investment is debt rather than equity, be sure the terms are clear with a table and dates of interest payments. Also, where mutually agreeable, include if possible an option that converts debt into equity at a future date and the rate at which your capital converts into shares. While many companies do not include this option, it is a worthwhile negotiation strategy.
  1. Regular company updates: The agreement should insist that you receive regular financial, product sales, R&D, and HR/staffing updates as appropriate. Quarterly is a reasonable expectation. It is possible that you could receive a board position in an early stage company if you are seeking equity (not likely for debt but still possible). Be sure to understand that such access to company information while very useful, also obligates you to a fiduciary responsibility to the Company and not to your personal investment. You should balance your gaining daily/monthly access against the greater responsibilities this access could obligate you. Regardless, you will want to know how income and cash flow are meeting forecasts.
  1. Exit and subsequent company offers: Many investors overlook this item and in my mind, it is often the most important of all. How do you convert your capital investment into hard returns? Do you get annual dividends? If later offerings occur, do you have a first right of refusal to invest more capital? Can your investment be easily diluted? Can you be forced to sell your shares? What happens if the company is sold, do you have an option to cash out or are you obligated to convert equity into a new entity? Your attorney can help work through these details, but the company should have this all worked out thoroughly.

Financial Forecast 3Each of these sections probably warrants its own blog. The key here is that a good platform will have helped work out most of these details during their screening and due diligence process. Some platforms will post any deal out there and collect their marketing fees. You should be sure that the platform of choice (can I put in a shameless plug for RAZR Ventures again?) looks out for BOTH the interests of the company and the investor. In my opinion, it is in the platform’s best interests to do so and in the long run their reputation will reflect this dual commitment and attention to both entrepreneurs and accredited investors.

Dr. Rickel is a Senior Advisor at RAZR with executive experience across multiple industries. Member of CFIRA, NLCFA. Todd can be reached at $