The Dynamics of Rewards v. Equity and Their Impact on Future Crowdfunding Campaigns
As we move towards the allowance of equity crowdfunding in North America and elsewhere, parties seeking to crowdfund ventures will want to give serious consideration to the dynamics and impact of offering rewards or an equity stake in the venture being funded. Going forward, for the reasons outlined herein, one expects that more and more, future campaigns will have a creative blend of both, depending on the project being funded.
Rewards of course can be just about anything, from a simple digital thank you to active participation in the implementation of the project (e.g. visiting the offices of the funded venture and meeting the key players or being part of a scene in a movie or music video being produced). For the project owners, reward campaigns have the advantage of having no limit on the amount of money that can be crowd sourced, and no ownership is given up in the project/venture.
Equity crowdfunding of course gives project backers an actual stake in the growth and success of the business, beyond some trinket or fun participatory experience. It also carries with it the notion of a more serious business initiative, closer to traditional financings and the making of an actual “investment”. It will also require more accountability to the marketplace, regulators, and the investors in the business.
Different people obviously have different motives for funding different projects, but there are some consistencies in the mindset of funders that, if taken into account, will go a long way to enhance the success of a funding initiative and ongoing venture. Human nature is such that when a venture is very successful, in addition to being able to proudly say that you had the foresight to assist the company in its early days, everyone loves a payout. It’s like having a lottery ticket. So while reward-funding might come from the heart, or a desire for a unique experience or a new product, making a good return on an investment decision and getting your dollars back and then some, is a whole different dynamic altogether. In addition to the funder’s ability to claim great foresight, he/she is also financially rewarded for it.
Interestingly enough, it is also human nature to feel that in addition to one’s reward for early support of a campaign, the backer is entitled to some financial benefit if the venture is hugely successful. This can be clearly seen in the backlash of the recent reward crowdfunding of Oculus Rift, and its subsequent acquisition by Facebook. Even though the campaign was clearly reward-based, the fact that the owners of the venture made what most would call a windfall, and the funders received no additional benefit other than their “reward”, left a sour taste in many backers’ mouths. It likely will also give cause to some to query the wisdom of supporting reward-based only campaigns. As succinctly reported by The Guardian:
“Meanwhile, there seems to be an obvious question of economic justice here. The original Kickstarter backers of Oculus Rift might not have been explicitly granted shares in the company, but the company wouldn’t exist without their initial contribution. About 10,000 people gave Oculus $2.5m between them. I for one am struggling to think of a good reason why each of them shouldn’t get a proportional share of that $2bn sale.”
The promise of being able one day to crouch drooling in a corner with goggles glued to your face while you repeatedly jab your “Like” finger into the eerily yielding faces of 3D virtual babies, doesn’t seem like such a good deal by comparison.
(Credit: Steven Poole, theguardian.com, Thursday, March 27, 2014)
As people come to better understand the nuances of crowdfunding, expect to see more and more blending of rewards with equity in the more creative campaigns. This could represent the best of both worlds. The funders get an initial positive result in receiving something unique, while retaining for a rainy day the possibility of an actual financial benefit, as and when the venture becomes truly successful. In traditional financing circles, it is not uncommon to include additional benefits known as “sweeteners” (e.g. an option to acquire additional equity at a future date). In new crowdfunding initiatives, such “sweeteners”, in the form of experiences or other benefits, can be just as appealing and could prove to be very helpful in not only ensuring a successful funding campaign, but also keeping funders happy throughout the growth and success of the venture.