Likewise, it is important to understand the type of investment you’re making, which will typically fall within three categories: equity, lending, or royalty-based.
Equity: An investor receives a portion of the entrepreneur’s company in exchange for funding. Over time, that investment can gain or lose value, similar to stock in a publicly traded company. Unlike publicly traded stock, however, shares in a start-up will not trade in an active market.
Lending: An investor loans money to a start-up and requires repayment in the future, with or without additional interest.
Royalty-based: Investors receive a share of earned revenue from an investment in a crowdfunding campaign.
Each investment option offers a different risk/reward outcome, and it is crucial that investors consider their objectives from the outset.
Finally, investors need to be keen on the nuts and bolts of evaluating a novel business concept: What does a promising business plan look like? How big is the market opportunity? Does the entrepreneur have a history of business success or disappointment?
As the saying goes, failure to prepare is preparing to fail.
For investors, that means two things: set realistic expectations and do the hard work. While the odds aren’t great, some investors will play their cards right and run into a little luck. Who knows? You could uncover the next Google Inc (NASDAQ:GOOG) in a garage just down the street.
A look at the future of crowdfunding
By removing the ban on general solicitation, the SEC will bring a wealth of crowdfunding advertisements to cities across America. While only a fraction of Americans will have the opportunity to invest, the rest of us will be able to evaluate the projects and watch this new fundraising platform develop over time.
During the next few weeks, The Motley Fool will be publishing a series on the most interesting crowdfunding developments, delving into everything from game-changing ideas to crucial investor protections. We will also feature an in-depth interview with Fundrise, a local Washington, D.C., real estate crowdfunding company. Fundrise, in some ways, is one step ahead of the crowdfunding field in its quest to “democratize local investment.”
At its best, crowdfunding has the potential to bring transparency to a private equity market that’s remained incredibly opaque for decades. As it continues to take root, the tool that emerged as a fundraising platform for free merchandise could cause quite a stir in the investing industry.
The article Want to Invest in Crowdfunding? Read This First originally appeared on Fool.com and is written by Isaac Pino, CPA.
Isaac Pino, CPA owns shares of Google. The Motley Fool recommends Google. The Motley Fool owns shares of Google.
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