Crowdfunding: Rewards, Equity, and Debt-Based Models

The Three Types of Crowdfunding

Crowdfunding is not one thing. It is three fundamentally different models, each with its own rules, platforms, and strategies.

Rewards-Based Crowdfunding

Backers give you money in exchange for a product, a perk, or an experience. They are not investors. They are pre-order customers. Platforms like Kickstarter and Indiegogo are the most well-known.

Best for: Physical products, creative projects, consumer goods, and anything with a tangible deliverable.

Typical raise: $5,000 to $500,000 (though some campaigns raise millions).

Key advantage: You validate market demand before you manufacture. If nobody backs your campaign, you know the product does not have an audience, and you have not spent $50,000 on inventory.

Equity Crowdfunding

Investors buy actual shares in your company. Thanks to SEC Regulation Crowdfunding (Reg CF), companies can raise up to $5 million from both accredited and non-accredited investors through registered funding portals.

Best for: Early-stage companies that want to raise capital from a broad base of small investors, especially if those investors are also your customers.

Typical raise: $50,000 to $5 million.

Key advantage: You can raise from people who are passionate about your brand. They become evangelists, not just investors.

Debt-Based Crowdfunding (Peer-to-Peer Lending)

Lenders fund your loan through a platform, and you repay with interest. This is essentially a loan, but instead of coming from a bank, it comes from many individual lenders.

Best for: Businesses with steady revenue that need working capital or a specific project funded.

Typical raise: $5,000 to $500,000.

Key advantage: No equity dilution. You borrow money, pay it back with interest, and retain full ownership.

Running a Successful Rewards Campaign

Before You Launch

The biggest mistake in crowdfunding is launching before you are ready. Most successful campaigns spend 2 to 3 months preparing before they go live.

Build your audience first. Create an email list, build a social media following, and engage your potential backers before you launch. Your first 48 hours are critical. Campaigns that reach 30% of their goal in the first two days are much more likely to succeed.

Create a compelling video. Your campaign video is your pitch. Keep it under 3 minutes. Show the product, explain the problem it solves, and tell your story. Professional quality matters, but authenticity matters more.

Set a realistic funding goal. Calculate the absolute minimum you need to deliver on your promises. Setting the goal too high kills campaigns. Setting it too low means you might fund but not have enough money to actually deliver.

Plan your reward tiers. Offer 3 to 5 tiers. The most popular price point for Kickstarter rewards is $25 to $50. Include an early-bird discount for the first 100 backers. Make the tiers clear and simple.

During the Campaign

Drive traffic relentlessly. Crowdfunding platforms bring some visitors, but most of your backers will come from your own marketing efforts. Email your list. Post on social media daily. Reach out to press and bloggers. Run targeted ads.

Communicate constantly. Post updates at least weekly. Respond to every comment and question. Backers want to feel like they are part of the journey.

Have a mid-campaign push. Most campaigns see a dip in the middle. Plan a new reveal, a stretch goal, or a limited-time reward to reignite interest.

Running an Equity Crowdfunding Campaign

Legal Requirements

Equity crowdfunding is regulated by the SEC. You must file a Form C with the SEC and conduct your raise through a registered funding portal. You will also need:

• Financial statements (reviewed or audited for larger raises)
• A detailed business plan and use of funds
• Disclosure of risks, ownership structure, and related-party transactions

Choosing a Platform

Several platforms are registered as funding portals with the SEC. Research which ones focus on your industry, compare fees (typically 5% to 10% of the raise), and look at their track record of successful campaigns.

Investor Limits

Non-accredited investors are limited in how much they can invest per year based on their income and net worth. Your platform will handle these compliance checks, but be aware that individual investment amounts may be small ($100 to $5,000 per investor).

After the Campaign

You now have potentially hundreds of shareholders. You are required to file annual reports with the SEC and provide ongoing updates to your investors. Budget for the administrative and legal costs of managing a large shareholder base.

Costs and Fees to Expect

• Platform fees: 5% to 10% of total funds raised
• Payment processing: 2% to 5% of funds
• Legal fees (equity crowdfunding): $5,000 to $25,000 for SEC filings and compliance
• Marketing costs: Budget at least $2,000 to $10,000 for pre-launch and campaign marketing
• Fulfillment costs (rewards): Shipping, manufacturing, and packaging for physical rewards

Common Crowdfunding Mistakes

• Underestimating fulfillment costs: Shipping physical products is expensive, especially internationally. Many campaigns raise their goal but lose money on fulfillment.
• Over-promising and under-delivering: Set realistic timelines and deliverables. Late delivery frustrates backers but honest communication retains goodwill.
• Neglecting the campaign after launch: A campaign is not a set-it-and-forget-it fundraiser. It requires daily attention and marketing.
• Ignoring taxes: Crowdfunding income is taxable. Rewards revenue is income. Equity sales have securities implications. Talk to your accountant before launching.

Is Crowdfunding Right for You?

Crowdfunding works best when you have a compelling story, a product people can get excited about, and the energy to run a marketing campaign for 30 to 60 days straight. It is also excellent for market validation. If people will not back your product on Kickstarter, they probably will not buy it in a store either.

It works less well for services, B2B products, or anything that is hard to explain in a 3-minute video. If your business is not consumer-facing or visually compelling, other funding sources may be more effective.