The New Investor’s Guide to Equity Crowdfunding Jargon
If you’re new to equity crowdfunding—or just the investing world in general—you’ll quickly realize there are a lot of new acronyms and jargon in this world. Exit … convertibles… IPO … liquidity … what?! Keep reading for a primer on all the relevant investing and equity crowdfunding vocab.
What is equity crowdfunding?
Equity crowdfunding has gotten a lot of buzz as the new frontier in investing.
The model is simple: entrepreneurs offer a share in their business in exchange for cash upfront—from anyone. Most businesses seeking crowdfunding use the raised capital to establish basic operations, product development, and scale up to a launching point for future funding sources.
This is the power of equity crowdfunding: many new businesses have difficulty accessing traditional sources of funding, such as credit and venture capital. Equity crowdfunding allows anyone to fundraise—and anyone to invest—regardless of net worth or wealth. The risks are great— but so are the rewards.
Whether it’s the democratization of investing that appeals to you, or you’re just looking to support your community by investing in projects you believe in, equity crowdfunding has a lot to offer to investors.
But the insider lingo of equity crowdfunding can feel like its own language! Jargon and acronyms abound, but have no fear. Read on for a quick primer on some common phrases you might encounter while perusing the crowdfunding pages of our clients. You’ll be throwing these words around like a pro in no time.
Equity Crowdfunding Jargon 101
Angel investor: The first individuals to invest in a business, traditionally an accredited investor and/or high-net-worth individual. Angel investors often invest a large amount in the first round of fundraising, meet the founder in person, and invest significant time in directly influencing and advising the company. Since the passage of a U.S. law in 2016 removing restrictions on equity crowdfunding investment, non-accredited investors can invest up to 10% of their net worth or annual income per offering.
Convertibles: Debt that converts into equity. For example, an investor purchases a convertible that starts as a loan to the venture, and later converts to a share of equity in the company as it becomes profitable, instead of cash repayment on the debt.
Equity Crowdfunding: Businesses raise cash by offering a share of future profits or equity to investors. Investors can be anyone! This is a public, open transaction. You may also see equity crowdfunding referred to as crowd-investing, investment crowdfunding, or crowd equity.
Exit: When a startup or business venture has become successful enough to be purchased by another larger company, or when it makes an IPO (see below). Both instances are very profitable for investors.
IPO: Initial Public Offering. When a privately held company begins selling public shares to raise capital for operations or expansion. A big step for the company, taking it from private to public, requiring them to first meet strict regulations from the Securities and Exchange Commission (SEC). In nearly all equity crowdfunding campaigns, the company is pre-IPO.
Liquidity: A measurement of how easily a company’s asset can be converted into cash without affecting its market price, or how easy it is to sell an investment. Cash itself is the ultimate ‘liquid’ asset.
Revenue traction: Indicators of a business’s success, typically referring to a hockey-stick-shaped chart with a sharp inflection point in which the venture has gained traction in the marketplace, and revenue begins to quickly increase.
Seed funding: aka seed round, seed money, seed capital. The first round of funding raised by a venture’s founders, often from friends, family, and acquaintances. This round typically pays for basic operations with the ultimate goal of scaling up to larger funding opportunities.
SEC: Securities and Exchange Commission, the federal regulatory body in the United States that regulates the securities market and protects investors and the national banking system from market manipulation. The SEC regulates Title III, which made equity crowdfunding legal in 2016 via the JOBS Act.
SPV: Special purpose vehicle. A separate legal entity created by investor companies to isolate the investment risk. In equity crowdfunding, an SPV is typically created to pool all the raised funds, which is then directed by an appointed SPV manager.
Returns: Equity crowdfunding investors can expect their investment to be returned in one of several ways: as debt, convertibles, or stock with or without dividends.
Debt returns are a known repayment schedule and interest amount. This is typically less risky with lower returns.
Convertibles is an investment of an initial loan that’s repaid as future equity in the company.
Stock is equity in the company, with or without dividends. With dividends, shareholders can expect periodic payments from a share of the company’s revenue, similar to interest on a loan. Stocks without dividends often see higher long-term growth in value, as the money that would be spent on dividends can instead be spent on growing the company and/or a share buyback.
VC: Venture capital, or venture capitalist. Private equity investors, traditionally wealthy individuals and firms, who invest cash in businesses they deem likely to succeed, in return for projected future shares in the company.
Arora Project is your equity crowdfunding marketing expert.
For an even deeper dive into the world of equity crowdfunding jargon, check out the delightfully cheeky Wefunder glossary. Did you know Arora Project is Wefunder’s #1 marketing partner with a 100% success rate in equity crowdfunding campaigns? Let us fundraise your next venture.