What is the most viable model for equity based crowdfunding?
One of the following two:
Revenue-backed, interest-bearing notes with a kicker multiple
The funds go into the company as a loan, and get repaid with interest by distributing a fixed percentage of gross revenues (say, 5%) among all the note holders. Once the base+interest has been returned to the investors, the company continues to pay out a percentage of revenues (perhaps at a lesser figure, say, 2.5%) until the investors have received a fixed multiple of their original investment (say, 5x). At any time, the company may retire the note(s) by paying off the base+interest+5x kicker.*
Some sites will use a similar approach, but limit the repayment by time (say, 5% of revenues for the first three years) rather than a multiple of the investment, but this is problematic for a number of reasons.
Single-holder special purpose vehicles with professional manager
These entities will hold the individual crowd-funded investments, and aggregate them, from the company’s perspective, into a single entity on the company’s cap table. The professional manager of the vehicle will handle all administrative work for both investors and the company, and will contractually be obligated to abstain on any shareholder votes.
*Note that Gust, which will NOT itself be providing an equity-based crowdfunding platform for non-Accredited Investors as envisioned under the JOBS Act, will, however, be offering a program to work with such platforms and help integrate them into the larger angel/venture Accredited Investor financing ecosystem. One component of the program will be a full set of the documents needed to implement the first approach above.
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This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.