Equity vs Reward Crowdfunding – What are the Differences?

Find out what alternative type of fundraising may be suitable for your business

Equity vs reward crowdfunding are words you may have heard if you’re familiar with business and investment terminologies. Perhaps_, you may have even heard of these terms even if you’ve never invested in a venture. 

Thanks to the rapidly changing business landscape, customer preferences have fluctuated, and the traditional models of business have transformed dramatically. 

In the midst of this crazy yet exciting whirlpool of change, new terms and catchphrases have popped up everywhere. While most people have caught up with them, you would probably still frown at a few unfamiliar terms and concepts here and there. 

In this article, we explain to you two fundamental methods of financing new businesses and start-ups of the modern digital era: equity crowdfunding and reward crowdfunding.

What is crowdfunding?

Crowdfunding is a new and exciting method of raising funds for early-stage businesses and ventures. Growing rapidly due to the wedlock between the power of the internet and the increasing trend of entrepreneurship, equity crowdfunding allows businesses to secure capital from anyone who is interested: namely, the public, angel investors, venture capitalists, etc. 

In this way, crowdfunding bypasses all the shortcomings of the traditional methods of fundraising — no longer do you have to rely solely upon your family and rich friends or be drowned in debts from bank loans to bring your business ideas into reality; you can simply pitch your case to the public seeking their investment. 

Usually, crowdfunding today involves an online platform that acts as a third party and facilitates communication and transactions between the investors and the businesses. Hence before we go to the differences between the two types of crowdfunding, we need to understand the key players of the process. 

Introducing the players

There are three key players in crowdfunding: 

1. The Crowd: The crowd is the group of people who invest in different ventures and projects. They can consist of the general public, venture capitalists, angel investors, or big corporations seeking shares in other companies. The crowd uses the platform to access information about projects and to make investments in them. 

2. The Platform: This is usually an online platform (e.g. a website/app) that facilitates communication and transaction between the crowd and the businesses seeking capital in exchange for a fee. Once individuals or businesses sign up their projects to be financed, the platform verifies the authenticity of the project and then puts up relevant information of the project to the public. The public can then make investments (via online payments) in their projects of choice. 

3. The Project: The project can be any business or even creative venture initiated by an individual or a start-up company. The project has a set target of funds it needs to raise in order to successfully move to its implementation. 

What is Equity Crowdfunding?

In Equity Crowdfunding (ECF), companies seek investments from the crowd (via the platform) in exchange for equity i.e. shares of ownership in the company. 

The crowd that invests in such a project gains a share in the company and earns a part of the company’s profits and dividends as the company continues its operation. 

At the same time, the company benefits as it doesn’t get itself drowned in debts at its start-up phase and the company owners gain funds that can potentially help the company grow in value. 

What is Reward Crowdfunding?

Reward crowdfunding, also known as seed crowdfunding, is an alternative form of raising funds for small-business whereby entrepreneurs seek investments from individuals in return for a product or service. 

This allows businesses to transform a promising idea into a profitable reality without having to pay back a single penny. With reward crowdfunding, the project is featured on the platform and the crowd invests in it, but instead of getting a share/equity in the company, they get a product or a service in return.

Equity vs Reward crowdfunding

While both equity crowdfunding and reward crowdfunding involve raising funds from the crowd via the platform for a new project, the key difference between them is what the investment is exchanged for. 

In the case of equity crowdfunding, the crowd gains a share of the ownership of the company, whereas in reward crowdfunding the company gives a product or a service to the crowd. Essentially, reward crowdfunding involves the crowd getting a reward in the form of a product (hence named “reward”) from the company, whereas in equity crowdfunding the crowd buys shares of the company. To know more about the benefits of reward crowdfunding, check out our article here.

In summary, both equity crowdfunding and reward crowdfunding give new ventures the opportunity to raise funds for financing their projects. Individuals or companies seeking to raise funds should first seriously consider whether they can afford to lose parts of their ownership of the company in exchange for funds, and in the case where they don’t want to lose ownership, they can explore alternative methods such as reward crowdfunding. 

Investors also need to reflect upon whether they want a share in the company to gain steady dividends in the long term or get a special product or service from the company. At the end of the day, each company and investor is uniquely positioned due to their circumstances, hence they will need to decide for themselves which path they wish to take.

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