We use cookies to improve your experience on this site. By viewing our pages, you give us consent to use cookies. Find out more.

Should I Overfund My Business?

Posted 5 months ago

Should I Overfund My Business?
Share this article:

Crowdfunding in general has played a huge role in helping businesses get the boost they need and gain the funds they need. Equity crowdfunding is much the same practice; it involves the selling of shares within your business as opposed to products/promotions pre-funded by the crowd. 

Conventional wisdom would say that the biggest issue when pitching your business/idea is being unable to fulfill your funding goal. But this is not always the case. With the crowdfunding market worth over £363 million in 2018, the amount of investment funnelled into businesses is extraordinary. Last year £272m was invested into businesses via equity crowdfunding in the UK. 

The equity crowdfunding market has become so accessible in recent years that anyone can invest, providing you agree to rules set out by the Financial Conduct Authority (FCA) for retail investors that you will not invest more than 10% of your net worth via equity crowdfunding and that you fully understand the risks involved.. 

A situation has arisen which is the exact opposite of what one would expect; overfunded campaigns. Some businesses overfund which means that they need to offer more shares than originally expected. This can mean, depending on how the campaign has been set up, that your position as an investor in the company will be less than you originally expected. However, the value of the business would have increased to the sum raised. We call this a post-money valuation. 

Sacha Bright, CEO NextFin

“It’s a bittersweet problem to have and can be overwhelming for the business, not to mention flattering. It’s of course reassuring; it shows that the business has a strong backing. Of course, you aren’t required to let your campaign be overfunded, but if given the chance and your target is reached early, it’s definitely something to consider.

“You need to look at whether or not you want or need more investors. Could you do with extra funds or are you capable of reaching your goal with the original funds? Are you willing to give away more equity in your business or have you parted with a big enough share as it is?

“These are the most important things to ask yourself. It’s great to have strong investors who want to see you succeed just as much as you want to. Some will even bring knowledge to the table or diversities that can help you reach your goals. But how much are you willing to let in? Can you afford to give away a higher share of the business than you originally intend?

“These are the questions you should ask yourself before making a decision about overfunding:

  • Can I afford to give away a higher share in my business?
  • Do I want to give away a higher share in my business?
  • What can the extra funds do for my business and its expansion?
  • What will I be left with?
  • How much equity should I retain for future funding rounds?
  • What does my shareholders’ agreement allow me to do with a diluted stake? 

“Coronavirus aside, for one moment, the crowdfunding industry has boomed. It’s rapidly becoming a global operation, with a high level of interest in the market from existing and new investors. 

“Don’t forget, this is a highly risky and illiquid marketplace where many projects fail and investors can lose all capital invested, however it’s hard not to get swept up in the excitement of it all.

“From an entrepreneurial point of view, it’s easy to be lured by the prospect of retaining a larger position in your company, and not diluting yourself.

“Having a business that is overly-capitalised is a fantastic position to be in and you may not have another opportunity to raise the capital on offer to you right now. The biggest issue to look at is the shareholders’ agreement, and how your stake in the business reflects upon how you and the business is protected in the future. 

“If you are diluted so far that your stake stops you from making important decisions and is not seen as a big enough reward to make the business a success, new investors may not invest in the future.”

Authors: Sacha Bright & Oliver Murphy

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed. Nextfin is not liable for any damages arising from the use of or inability to use this site or any material contained in it, or from any action taken as a result of using the site. 

Tagged: sme entrepreneur raising funds equity crowdfunding eis seis alternative finance



Be a contributor to our blog click here to contact us
Click here to sign up to our newsletter

0 comments

Log in to comment

We reserve the right to remove comments which are inappropriate and/or offensive.
Comments are not the opinion of Nextfin.uk. Please read the comment guidelines
  • Internet Business Awards Category Award Winner 2015
  • Hertfordshire Business Awards Finalist 2014

As seen in:

  • The Guardian
  • Financial Times
  • Yahoo! Finance
  • The Times
  • The Daily Telegraph