7 rules you must know about crowdfunding

7 Rules You Must Know
About
Joseph Hogue, CFA
Admin@crowd101.com
October 2014
All copyrights reserved
Please feel free to email and share this document with friends but it may not be altered in any way.

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Introduction
Thank you for visiting Crowd101.com and signing up as a subscriber to our email list. This book is the result of years
working with crowdfunding projects and investors. Within these pages, you’ll find the seven most important rules to
raising money and investing in the crowdfunding world. You won’t find every idea out there but you will find those
absolutely necessary to making your experience a success. If you remember nothing else from the website or from
other sources, remember these seven rules.
This report is broken into two sections. The first section, Crowdfunding Projects, includes the must know rules for
getting your crowdfunding campaign running and fully funded. The second section, Investors and Funders, is focused on
the rules that you need to understand when picking which projects to sponsor or in which to invest.
There is an important point to make within these two sections. Crowdfunding in its current form is separated into
donation-based projects that do not offer an equity ownership and equity crowdfunding that does offer some form of
ownership. Some rules within each section may seem particularly suited to one form of crowdfunding or the other. Both
forms of crowdfunding carry many similarities and reading through the entire section will help generate ideas regardless
of whether your project is a donation-based project or a startup company seeking investors.
Crowd101.com is your first stop into the world of crowdfunding. Unlike other sites that only cater to projects, on
Crowd101.com you’ll find information for both investors and crowdfunding campaigns. You’ll find information that is
directly helpful in getting your project funded and information that helps to understand what investors and supporters
are looking for in a project.
My Name is Joseph Hogue. I have worked in the investment industry for more than a decade as an analyst. I have
worked for large multi-national banks to value million dollar portfolios of loans and stock investments and as a
consultant to individuals on meeting their financial goals. I am a graduate of Iowa State University with a degree in
Finance and an MBA in Business. I also hold the Chartered Financial Analyst (CFA) designation, the gold standard in
investment analysis and management.
Beyond working as an investment analyst, I’ve also followed the peer lending and crowdfunding revolution for years. I
have worked with companies seeking funds and individuals just trying to get the money they need.
Why does a guy go from Wall Street analyst to managing a blog on crowdfunding? I truly believe that the peer lending
and crowdfunding trend will revolutionize the financial markets. For the first time in history, regular people will have
access to investments that previously were only open to large companies and wealthy individuals. The new supply of
money will provide billions to new businesses and consumer lending, sending capital exactly where it needs to go to
move our economy.
That is something I think everyone will want to be a part of.

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Introduction 2
How We Got Here 4
Crowdfunding Projects
Make it Personal and Make an Impact 7
If you Build It, They Might Still Not Come 9
Make it a Team Effort 12
Think like a Banker 13
What's Next? 16
Investors and Funders
Scams and Scoundrels 18
Analyzing a Project 20
Understanding Ownership 25
What's Next? 27
Crowdfunding Sites Reviewed 28
Thank you 31
Table of Contents

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How We Got Here
While the real momentum in crowdfunding has only just started with the implementation of the JOBS Act, I suppose the
roots of the idea could be traced further back to the open source wave in technology.
In the early 1980s people in the tech world started distributing their software for free on the concept that it was a social
imperative to share the technology with everyone. The idea was simple. Everyone that received the software could help
improve it. This crowdsourcing of technology helped to jumpstart the global technology boom of the 90s and is
responsible for many of the advances we have today.
Fast forward nearly three decades and we get the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012.
The crowdfunding portion of the act opens up the market for entrepreneurs to solicit the general public for funds, a
contradiction to earlier rules by the Securities & Exchange Commission (SEC).
The JOBS Act limits funding to no more than $1 million over a 12 month period and no single investor can fund more
than 5% of their annual income (if less than $100,000 a year) or more than 10% if the investor’s income is over $100,000
per year.
Funding must also be carried out through a registered broker or a funding portal and the issuer must comply with
registration requirements.
One year after passage of Title II of the JOBS Act and a total of 534 of 3,361 companies successfully met their
crowdfunding goal for equity participation. More than $200 million in equity capital has been raised, averaging a little
over $400k per company.
Despite the fact that the majority of projects went unfunded, capital commitments on the crowdfunding platforms has
increased every quarter over the last year and the future looks bright for new startups.
Title III of the JOBS Act, yet to be passed, will permit non-accredited investors to participate in the crowdfunding
revolution. There are an estimated nine million accredited investors in the United States, those with a net worth over $1
million or an income over $200,000 per year.

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The chart below, from census data, presents U.S. households by income in 2013. Even if we assume a market of
households with $50,000 annual income and above, passage of Title III will increase the market’s size by more than ten-
fold.
I’m not sure anyone can predict the affect Title III will have on the economy or the disruption to the capital markets. At
no other time in our history has investment opened up to so many so quickly. Final passage of the JOBS Act will be a true
democratization of capital with investors and entrepreneurs both set to reap the rewards.
I’m excited to be a part of this financing revolution and can’t wait to see how it opens the world of finance to everyone.

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Crowdfunding Projects
Crowdfunding has the potential to bring billions of dollars in funding to companies and projects that might otherwise
never get off the ground. Just a year after Title II of the JOBS Act was passed, equity crowdfunders have raised hundreds
of millions and donation-based projects have raised billions.
Crowdfunding in 2012 reached $2.7 billion, an 81% increase from the prior year and is expected to reach $5.1 billion in
2013.
And that is all before crowdfunding has gone mainstream.
The U.S. market for angel investing and startup financing
reached nearly $50 billion in 2012. On top of this, lenders
granted 20.3 million small business loans worth $159.3
billion bringing the total to nearly $210 billion from just
three avenues of small business funding.
When Title III of the JOBS Act is passed, the potential pool
of investors to equity crowdfunding could grow more than
ten-fold. If just 10% of small business funding goes
through crowdfunding, the market would total $21 billion.
How the opportunity develops will depend on a number of things; how quickly the government moves to pass
legislation, how quickly people accept crowdfunding and how much of their money they donate or invest in projects.
Given the growth in donation-based crowdfunding, nearly doubling each year, the opportunity could be immense.
But raising money through the crowd is not as simple as just filling out an application on one of the funding sites. Even if
you are just raising funds for a short-term project, your crowdfunding campaign could very well turn into a part-time
job. Starting a company or an on-going charitable mission with funds from crowdfunding is just as detailed and takes just
as much time as doing so with traditional financing.
The rules included in this report should give you an idea of just how detailed a crowdfunding campaign can be, and
these rules encompass steps that are only a portion of the work you will need to do.
Before you get discouraged, understand that millions before you have taken the risk to start a new company or
charitable project and have been rewarded with innumerable benefits. The opportunity to change the world or just the
community around you is priceless and crowdfunding can help you take advantage of that opportunity. It’s a long road
ahead but well worth it.

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Make it Personal and Make an Impact
Despite the rise of social media and interconnectedness today, the internet still feels like a very impersonal experience
for many people. Anonymous comments are used as a way to rant on once taboo subjects and social connections
developed on sites like Facebook only rarely lead to any type of interaction.
But we are social creatures and we crave interaction with other people. Why do you suppose reality TV has become so
popular, besides as a means of feeling good about your own lot in life? Because people want to feel involved in the lives
of others, they want to share life experiences and be a part of a community. The sad fact is that most of us do not have
much an opportunity to feel that sense of community within our hectic schedules.
Up until the crowdfunding revolution, most people’s exposure to marketing has been through commercials that have
gotten so inane that we have learned to unconsciously block them out.
Put it together and you have a huge opportunity for your crowdfunding campaign. An opportunity that, sadly, goes
untapped by most projects. There are 6,558 of projects seeking funding on Kickstarter and 15,974 companies on
Crowdfunder right now. History shows that nearly 60% of them will not get funded.
Why?
Because it’s business, not personal. Projects, especially those seeking equity funding, focus so much on the numbers and
the straight-forward business pitch that they forget the power of personality.
Forget what you thought you knew about the world of finance. In crowdfunding; it’s personal, not business.
You need to form an immediate bond with anyone reading your project description. In our world of fast-food and faster
YouTube clips, you have very little time to reach someone before they decide to click to the next project. Pick out a
couple of sentences about your project that evoke the most emotion and describe the project in results. These points
should go to the top of your description before anything else.
Ultimately, many people will want to donate or invest in your project simply because they want to be a part of your
journey. That is why you need to tell your story, how you got to this point and how the project is the natural path
through that story.
Relating your project as a story and making it a personal journey will go a long way to making an impact on others.
Participation is essential in your project and could be the difference between getting funded or not. Give people a good
story and they will likely help out with a donation, give them a chance to be part of something bigger than themselves
and they will be busting your door down to help.
Evoke emotions through sight and sound
Use graphic images throughout your project request. It is best to hire a professional photographer to take shots directly
related to your location and idea but stock photos can also be used.

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If you are posting a video, you should be in it. Few of us consider ourselves incredibly photogenic and you need to get
over any fear you have of public speaking. A crowdfunding campaign is as much about selling yourself and your story as
it is about selling your project.
Yancey Strickler, cofounder of Kickstarter, reports that projects with videos have had a success rate of 54% while those
without a video have only been successfully funded 39% of the time. We are sensory creatures and any way you can
draw upon all five senses will help. Make a video of your project, even if it is just a brief one-minute teaser to the bigger
project request.
Taking it beyond friends and family
As with most of the ideas here, participation starts with your own close network of friends and family. Consider hosting
a dinner to highlight your project. Give a presentation, including your video and talk to everyone about the project.
Chances are, if you cannot draw your closest circle into the project with your vision and passion, you will probably have
a hard time doing it with total strangers.
Every donor or investor needs to be contacted to ask what they do and to be interviewed on what they can bring to the
project. That initial monetary commitment means they relate to your message and believe in what you’re doing. Use
that association to build a relationship and drive other forms of help. They may be able to provide services within their
profession or connect you to someone they know that offers services you need. They may be active in social groups and
can offer an introduction. Interviewing new donors or investors will open up a lot of information on the effectiveness of
your ask and may just find someone as passionate about the project as you are.
Above all, don’t forget a solid call to action at several points of your campaign. The call should be relatively mild
throughout the description then culminating in a strong, emotional ask at the end. Do not assume that people will know
what you want them to do. Tell them! Lay out steps that they can take or levels of support they can make.

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If you Build It, They Might Still Not Come
The explosion in crowdfunding, especially for donation-based projects, over the last several years has made people think
that raising money is as simple as posting a project on one of the popular sites. Great idea or not, a couple of days are
spent putting together a proposal and a brief budget. The project is posted and the entrepreneur waits for the money to
roll in.
And then they wait, and wait, and wait until they reach the project deadline and close it out discouraged. This is what
happens to more than 60% of projects.
Why? Just because you build it does not necessarily mean crowdfunders will come.
Building community
One of the biggest hurdles to overcome in crowdfunding is that of creating a community, rather than an audience.
Marketing classes in school are singularly focused on ‘reaching your audience’ and getting your message across. The
average American sees as many as 4,000 ads a day; so many that we have learned to subconsciously ignore them.
Billion-dollar corporations pay big bucks just to break through that subconscious roadblock and get the message across
to their target audience.
Buy you do not have a billion dollars. If you do, you would probably be paying someone to read this for you. If you
cannot reach hundreds of thousands with traditional marketing mega-bucks then you need the power of community.
Be warned, building a community is more than just getting people to click that they ‘Like’ your Facebook page. Building a
community is about establishing a relationship through interaction and trust. It is about sharing real value.
Communication is the key to building a community. We’ve all been there. You just put down a big chunk of money for
something and now you are wondering if it was a mistake. Buyer’s remorse!
You need to contact each of your funders to your project as soon as possible after they donate or invest. Reinforce those
ideas that led them to donate or invest and overcome their buyer’s remorse. This is most easily done with an auto-
respond message that strikes an emotional cord and hits on your key points. If you really want to build community
though, aim for a personal call within 24 hours.
It doesn’t stop there. Plan a series of contacts that you go through with every funder. Follow the call with an email the
next day that addresses any questions (you need to ask them and be listening for any doubts or questions) and
reinforces the key points in your project. The longer you can keep that emotional appeal in their mind, the more they
will grow to support your project.
After your initial contact and email, give them a few days then send another email asking for a favor. Make it something
relatively small like sharing an email with three of their closest friends. The more someone does for your project, the
more they share themselves, then the closer they will feel to the project and will make its goals their own.

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If you get a rejection to your request or the funder did not follow through with it, ask for something else. Researchers at
Stanford found that people are much more likely to say yes to a favor after rejecting an initial request. We have an inner
need to be friendly and help others. The guilt of rejecting someone not once, but twice is too much for many people.
After a request or two, gauge your supporter’s commitment with another phone call. Talk to them about a problem you
have been experiencing and ask their advice. You may even go so far as to ask them to help review or revise a detail of
the project. Anything to make them feel that they are a part of the project, that they have a level of ownership and a
motive to get it funded.
If they are eager to help, they may be ready for a bigger role in the community. Talk to them about how important it is
to get ‘our’ project funded and how it will make a difference. Talk with them about how important it is that other people
know of the project. From here it is only a short step to getting them to open up their own social network to the project.
Overcome your natural hesitation to be ‘pushy,’ there’s no place for it as a small business owner. If you are truly
passionate about your company or cause, it will show through and your perseverance will pay off.
Some in your community will become independent marketers and will need less reinforcement or guidance. You’ll still
need to touch base every once in a while to keep them motivated and involved but the interaction will be minimal to the
benefit they will bring. Others in your community will be just as enthusiastic but will need more guidance.
Some final thoughts:
 Provide a virtual button to funders that says, “I support project XYZ,” and ask them to display it in their email
signature and on their social networking pages. This can be a string of text that links to your project page but a
small image works best.
 Depending on the geographical reach of your community, you may be able to meet face-to-face with the most
motivated in your group. A personal visit is even more powerful in our world of clicks and likes. Try working your
way up from a quick coffee to helping them host a dinner party to reach out to others.
 If you have the ability and budget, a forum on your website can be a giant leap to creating community. This will
not only help exchange ideas but will help your community motivate each other with less direction from you.
 Your own budget and how many supporters you need will determine how you build your community. The best
method is through regular phone calls and personalized emails but this may not be possible with a small budget
and many funders. If your budget supports it, try hiring someone to help make those community contacts but
make sure they share your passion for the project.

Social Networking
They say that a person needs to see something seven times before it is converted to long-term memory. With social
media and the onslaught of virtual requests on the internet, I would bet this number is much higher. That is why you
have to make your social networking campaign completely integrated and redundant.
 Update all your personal profiles to include a description of the project and a link that directs to either your
project website or directly to the campaign page on the crowdfunding platform
 Add a button or clickable text signature to your email accounts
 Consider making a series of YouTube videos that you can post on Facebook and your project website. Make sure
you provide links within the video to your campaign
 Make regular Facebook status updates within your personal profile as well as the project’s profile
 Post information on the Facebook pages of related groups or organizations
 Comment on blog posts of subjects related to your project and provide a link back to your website or campaign.
Make sure your comment is relevant to the blog post or it could be considered as spam.
 Make sure you respond to any comments on your own blog or website
 Keep updated on any news related to your project and pass it along through your network
 Consider other social media sites besides Facebook as well, for example: LinkedIn, Pinterest, Twitter, Google+,
Instagram, Flickr, Vine, Meetup, Tagged, Ask.fm and Classmates

Make it a Team effort
While you may be the creator of the project and its top cheerleader, you absolutely must have at least one other person
willing to take some control of the project. They do not have to be a full 50/50 partner but they need to have some level
of ownership.
First, teams raise more money than single-person projects. Slava Rubin, founder of Indiegogo, states that teams raise an
average of 70% more money than campaigns run by a single person. Now part of this might be a function of multiple
people being able to do more work but it also helps build credibility in your project.
More people bring more experiences and professional ability to a team. Find a strong group of people with experience
that spans functional areas in business (i.e. marketing, finance, management, IT, etc.) and your project is no longer a
risky, garage-run startup but a full-fledged business. This is called social proof; the idea is that as more people trust and
contribute to your project it adds credibility to the venture.
Beyond just the perception of your project, teams bring real creative benefits as well. Those team members that span
functional areas in business will be able to bring a career of knowledge to the table and help organize the project.
Of course, the team on your project should extend beyond the physical members that organize and manage the project.
Bringing in supporters and making them feel like they are actual members of the team will go a long way to building
community and commitment.
If you are having trouble building your team, try a few of these suggestions:
 Friends and family should be your first stop to discussing the project and building a community. They will be the
first to point out holes in the idea and to offer advice. If on in particular is enthusiastic about the idea, and you
should work hard to bring at least one of your closest onboard, and then talk to them about being a formal part
of the team.
 Think through the relationships and interests your supporters will have. In which social groups and organizations
will they be involved? Become a member of these groups and start talking about the underlying idea for your
project well before you launch the campaign. This will not only help with feedback from people that are
genuinely interested in the idea but it may also uncover someone that wants to be part of the team. After you
have started the campaign, actively talk to supporters about the groups and organizations to which they are a
member.
 Look for major influencers within the groups or organizations that are related to your project. It may be
intimidating to bring someone onto the team that has more experience or influence than you but these people
are extremely important to the success of the project. Get over your fear of them taking control of the project
and let them be an active member of the team.

Think like a Banker
Crowdfund financing, even for donation-based projects, is a lot more than just asking for money and hoping people give
to the cause. Integrating a process of financing and rewards will go a long way to making your campaign a success.
First, understand that you need to create a budget for your project. This may seem counterintuitive to the creative- and
emotional-theme of your project but it will go a long way to establishing trust and credibility. The fact that you have
taken the time to detail each expense in your project will help show funders that you know the reality of seeing the
project through to completion. The actual detail in the budget will go a long way in establishing trust that you are
planning to do what you promise.
Budget must haves:
 Marketing expenses – will you need to advertise what your project or business offers?
 Administrative expenses – office support including supplies, rent, utilities, staffing are all important to show that
you will have the resources to make it work
 Equipment rental
 Insurance – property, health, workman’s compensation
 Travel expenses
 Professional fees
Multiple rounds of financing
Rolling close financing is an oft-overlooked topic in crowdfunding but can help show that your project has the initial
backing needed to go the distance. Data shows that most failed projects raise less than 10% of their goal and few
unfunded projects reach 50% of their target. Once a project reaches 50% of its goal, it is much more likely to reach its
funding target because of that social proof.
There are two ways you can use this:
 Break the project up into smaller projects – Raising a
smaller amount to get the cause off the ground and
develop the idea can be a great way to get things
started. When you are ready to raise money in a
second round, maybe to really get things started or
to expand your reach, you will be able to show the
support you received in the first round.
 Pre-launch financing – Raising money offline before
the campaign is formally launched can help get over
that tough initial hurdle and immediately establishes
social proof.
The idea is that you seek out different sources like traditional finance to secure initial funding which you can highlight in
your campaign. Many crowdfunders are hesitant to take out a bank loan for their project but bank financing, whether a
personal loan or a business loan, will go a long way to show your commitment and the merits of the project.

You might also consider a peer loan for the project. Peer loans are the loan equivalent to crowdfunding, online loans
supplied by the crowd in the same way a bank grants you a traditional loan. Interest rates can be competitive with
traditional bank financing and loans are generally available for three- or five-years. Stop by my other website,
PeerLoansOnline.com which covers everything you need to know about peer lending.
Building interest and community in your project before the campaign starts should help uncover your initial backers. Try
to get them to commit a certain amount over the first few days that your campaign is active on the crowdfunding
platform. This will help get the ball rolling on your funding status and provide that social proof that you need to convince
others to join. Some form of event or dinner focused around the pre-launch of your campaign is a great method of
securing these initial commitments.
Some of your supporters may be hesitant to commit fully before they see the social proof from others. Conditional
funding is an effective tool to get over these hesitant supporters. Ask them to commit to a certain amount if the project
funding reaches a specified percentage of your goal. This allows them to show their support but on the condition that
you make a strong effort to seek other backers. Most platforms will allow you to show conditional funds as part of your
total funding, which helps to show interest in your project.
Consider establishing different levels of funding need. Set your funding goal at the minimum you will need to fulfil your
promises within your budget. Then establish stretch goals that you would like to add into your project if funding is
reached. Remember, many sites require that your project meet its funding goal for the money to be released but that
doesn’t mean it cannot raise more than the funding target. Establishing stretch goals like expanding service to more
communities or expanding your project’s product can help to convince supporters to fund through your target.
Are there traditional sellers of your product or project? For donation-based projects, consider bringing in other charity
organizations to help with funding. They will already have the staff and institutional knowledge for a campaign. They
may also have it within their budget to actually donate to your cause. For equity crowdfunding campaigns, consider
bringing in commission-based sales people from traditional sources. For example: if your project is centered around real
estate, contact agents within your target market as part of the team.
Returns and Rewards
Returns and rewards are so important to a crowdfunding campaign that I almost made the section a completely
separate rule but decided to squeeze it in here.
For equity crowdfunding, the importance is obvious. Returns normally vary according to the stage of financing:
 Seed Capital – this is financing to establish the idea and the potential of a business. Often, depending on how
much is needed, this funding comes from family and your close network but it may also come from Angel
investors. The ownership percentage and potential return for supporters at this stage must be very high since
many ideas will not progress to the next stage. Many angel investor groups will not consider a project at this
stage without potential returns in excess of 30% a year.
 Startup Financing – This is generally the stage with which most are familiar. This is the initial money needed to
get everything up and running. An investment in startup capital from a venture capital or private equity firm
generally needs to meet a 20% annual return hurdle to even be considered.

 Operational Financing - Depending on how long the project or business will run, it may need additional funds
later on to reach enough customers to get to the point where sales cover expenses. Return requirements are
generally much lower for operational financing, on the order of 15% to 20% on an annual basis.
 Mezzanine Financing – Often called bridge financing, is the funding needed to transition from a private company
to a public company. Basically the funds needed for registration of securities and the process to sell shares or
possibly to sell the company to another private bidder. The return required by investors here is normally fairly
low because the company is already operational and the payoff is likely to be soon.
 Public Offer – This is the big payday, selling your company to public investors on one of the major exchanges.
Through crowdfunding, you have already sold an equity ownership to investors but publicly issuing shares can
open the company up to millions of investors.
Of course, you cannot simply promise high returns for your equity crowdfunding project. You must be able to
demonstrate how those returns will be achieved through a full proforma financial statement including market
assumptions and sensitivity analysis.
While you should emphasize the social impact and emotional appeal of your donation-based crowdfunding project,
rewards are also an important aspect. People like to receive something for their hard-earned dollars, whether it is an
emotional reward or a more physical one.
 Provide varying levels of rewards – even a donation of a dollar can bring someone onboard with the project and
gives you the opportunity to reach out to them for something more than a monetary contribution. Offering an,
“I support Project XYZ,” button for their email signature or social pages helps generate another link to your
campaign. Consider creating different buttons to denote different levels of sponsorship.
 Offer conditional rewards that kick in if the project reaches a certain level of funding. This is a powerful way to
keep your community motivated and virtually guarantee that the project achieves higher funding levels.
 Do not limit yourself to physical rewards. Do you or someone in your community possess a strong skill? Warren
Buffett regularly auctions a lunch to donors and receives offers in the millions! You may not see this level of
success but access to your insight or to a high-profile member of your team may be a sought after reward.
 Rewards are usually cumulative, meaning each level includes the rewards from previous levels. This upsell can
be a big driver of getting a little more out of your supporters.

What’s Next
There is a ton of work that goes into a successful crowdfunding campaign, even beyond the simple rules in this report.
Even after starting your campaign, you may get discouraged and struggle to keep your own motivation going. That is
where the commitment of your team and the support system within your community will pay off big time.
Still, crowdfunding is making it easier than ever to achieve your dreams and create that project that will really make a
difference. Billions of dollars have funded equity and donation-based projects and you can reach your funding target if
you follow through and follow the rules above.
The most successful projects are those in which just as much time was spent planning the campaign as is spent during
the campaign. Now is the time to start assembling your team and to use friends and family as a way to develop your
idea.
Once you have your team in place and a strong plan for the project, it is time to set up your resources and tools. Just
about anyone can set up a basic website and it doesn’t have to cost an arm and a leg. Set up all your social media
profiles as well and link everything together.
After you’ve got a solid plan and your resources put together, it is time to start pre-launch campaigning. Seeking out
those initial commitments to financing will go a long way to establish the social proof you need to convince total
strangers to donate to your cause.
If you are ready to start building your campaign, click through a link to one of the crowdfunding platforms on the
Crowd101 website. Platforms are separated into donation-based and equity sites.
One last point, do not let that huge sigh of relief after your project is funded turn to inaction and discontent for your
supporters. You may very well need additional funding in the future and the only way to do that is by keeping your
promises to supporters and investors.
It’s a long journey through concept to completion but incredibly worth it. I would love to hear your story and experience
with crowdfunding. Send me an email to admin@crowd101.com
Good luck.

Investors and Funders
I have spent more than a decade as an investment analyst for both individual investors and large private capital firms.
One thing I can tell you, the market is far from fair.
Rules by the SEC keep individual investors out of the market for startup financing and private equity. While most
investors are clawing for gains of 7% or less through stocks and bonds, venture capital and private equity firms are
investing in early-stage companies for returns of 20% or higher. There are risks to these types of investments but all
investing is inherently risky and there are ways to lessen risk.
But individual investors are not allowed to take those risks…until now.
The eventual passage of Title III of the JOBS Act will open up a whole new world of investment to regular people like you
and me. Not only will it allow tens of millions to profit from investment in start-up companies but the increase in funding
for small businesses could help the economy shoot higher.
Think about it, small businesses employ more than half the workforce and are responsible for creating two-thirds of the
new jobs in America over the last 15 years. If you increase the amount of available funding for start-ups and small
business growth, then the potential for new job creation could soar.
Whether you are investing through equity crowdfunding or donating to a project, you are making a difference. As the
market for crowdfunding grows over the next several years, we could start to see big changes in how our economy
works and how people benefit from this revolution in finance.
Despite the risks, to investors or funders, the benefits can be innumerable and the future could hold some pretty
dramatic changes. Read through the rules below and the posts on the Crowd101.com blog as we all take this journey
together.

Scams and Scoundrels
Even before crowdfunding has really gotten started, there are many that would have you believe the potential for
massive fraud will cripple the system and lead to financial ruin. As with any systemic change, there are bound to be
setbacks and those that would take advantage of others. I would be naïve to think this will not be the case with
crowdfunding as well but the reality is likely to be much less pervasive than doomsayers would have you believe.
Crowdfunding projects are an asset class and investing in them should follow the same rules as you would follow when
investing in stocks or bonds. To say that investing in crowdfunding projects will lead to financial ruin is ridiculous. It
would necessitate not only fraud or a failure of the project but also the gross negligence on the part of the investor that
invested everything into a single project.
Putting all your money in just one crowdfund project would be just as foolish as putting all your money in the stock of
just one company. Even if the company is a legitimate one, there is still the chance that returns will fail to meet
expectations. That is why you diversify over a portfolio of stocks in different companies.
If you really want to talk about investment fraud, how much money does the public lottery system rake in each year? A
government-operated lottery is offered in every Canadian province, 43 U.S. states, the District of Colombia and Puerto
Rico. In 2012, these lotteries raised $78 billion in the United States and $9 billion in Canada. Most games offer odds of
less than 20% that you will win your money back and one in millions that you will actually win any significant value.
Thanks but I’ll take my chances on a calculated risk in crowdfunding.
Investment risk should not be a big shock to anyone that has invested their money in the stock of public companies. The
S&P 500 has provided a respectable compound annual return of 7% over the last several decades but who can forget the
spectacular collapses over just the last decade and a half? And that is to say nothing of the multitude of companies listed
as penny stocks that require much less registration and reporting than equity crowdfunding projects.
The final regulations of Title III under the JOBS Act are still being negotiated but the draft rules include a great many
requirements to protect investors.
Funding portals must require projects to provide disclosures and investor education material. The funding portal is also
required to perform background checks on the issuer and monitor investor limits into individual projects. Beyond this,
the platform must also provide for a minimum 21-day review before any crowdfunded ownership is sold.

The Securities & Exchange Commission (SEC) also requires crowdfunding projects to register their securities, including:
 Name, legal status and address
 Names of directors, officers and 20% stakeholders
 Description of the business of the issuer and a business plan
 Prior year tax returns, plus financials
 Intended use of proceeds
 Target offering amount, deadline and progress updates through the life of the offering
 Share price and methodology to determine price
 Description of ownership and capital structure, including detail on terms of securities and those of previously
sold securities. Detail on shareholder rights and dilution of shares
Again, it is not that there will not be fraudulent crowdfunding projects but that a rational investment strategy with
thoughtful analysis will go a long way to limiting any exposure. Invest cautiously as you would in any investment and
invest for the long-term. We will cover analysis and red flags in the next rule.

Analyzing a Project
I spent more than 1,300 hours over three years to earn the designation of Chartered Financial Analyst, the gold standard
in investment analysis and management. Beyond formal education, I also have more than a decade of experience as an
analyst of stock investments. I cannot show you how to completely analyze a crowdfunding project in a few pages.
What I can help you with is to be able to find some of the red flags and warning signs when looking over financial
statements provided by crowdfunding projects. A full analysis of the project’s financial potential should include a review
of management experience, general economic outlook and competition within the company’s industry. Just as
crowdfunding projects should enlist the help of a team, it is also a good idea for investors to seek out the help of others
with experience in analyzing early-stage companies.
The Income Statement
The income statement is the most important document within the project package and possibly the only financial
statement provided by the project creators. The statement is a table of the sales, expenses, interest on debt, taxes and
special circumstances that account for a company’s earnings. As a potential investor in the project, you are a partial
owner of these earnings and so interested in how management plans on producing them.
The income statement provided by startup companies and crowdfunding projects is called a proforma statement
because it is an estimation of the next three to five years’ operations and earnings. Management has the responsibility
to estimate these figures in the most truthful way but also has a vested interest in showing the project in the most
favorable light possible.
Because the income statement is an estimate of future sales and expenses, there are many assumptions that
management must make…and there is where your analysis comes in.
Revenues – It all starts here and this is likely the most difficult to estimate. Management should provide guidance on the
size of the potential market to which it will sell as well as what kind of market share it thinks it can take from
competitors. As with many of the income statement line items, your first stop should be the income statement of
competitors. Any company with publicly-listed shares must provide an income statement in its annual and quarterly
filings, and it is usually easily accessible on the company’s web page under Investor Relations. You might try looking at
both the current annual filing and the first filings the company published to get an idea of how financial operations
changed over the life of the company.
 Does management think it can take an unrealistically large share of the market? How much competition is there
for the product?
 How fast does management think it can increase sales every year? While smaller and newer companies tend to
grow sales faster than larger companies, management’s estimate should not differ too much from the growth
rate of competitors without good justification.
 Is the estimate for sales realistic given the general economy and the stage of the business cycle over the next
five years? While management may not be fraudulently estimate sales, it may be unrealistically using a best case
scenario based on perfect economic conditions.

 Within your analysis, it is generally best to develop three estimates for where you think revenue might actually
end up. A best case scenario that is still realistic, a base case scenario that is most likely compared to
competitors and the economy, and a worst case scenario that represents the least you think possible.
Expenses – are also a potential source of manipulation and poor estimation
and must be thoroughly analyzed. Be wary of the project that lumps expenses
together into broad categories like Selling, General & Administrative. This may
be an acceptable level of presentation for billion dollar public companies with
years of reporting but it is a big warning sign for small startups. You should
look for expenses to be broken down to the smallest detail possible.
 Marketing expenses should generally agree with the rate of sales growth. A company looking to break into a
competitive market and grow sales will need to spend on advertising. If sales are estimated to grow at double-
digits while marketing expenses barely budge, the company better have a solid plan. You will also want to check
the percentage of marketing dollars to sales. Does the company expect to generate billions in sales with a
marketing budget of a couple million? Is this realistic compared to the marketing budget and sales for
competitors?
 Staffing costs will be high relative to sales in the first years but taper off when the company builds sales
momentum. Is the company in a labor-intensive industry or can a few people manage the whole firm?
 Depreciation is the expense taken on the normal wear and tear of equipment. If the company is capital-intensive
(i.e. requires a lot of machinery, computers or other equipment) then depreciation could be a significant part of
the income statement. The idea is that the company takes a charge for every year that equipment is used and so
the reduction in the useful life of the equipment is matched with the revenue it produces. This depreciation
reduces earnings but must be accounted for because eventually machinery will need to be replaced. A company
that does not account for depreciation is artificially boosting its earnings and misleading investors.
 Expenses for professional fees should be closely scrutinized. Management must disclose any conflicts of interest
within the notes to the financial statement. Often with small and startup companies, professional fees will be
paid to parties with some form of relationship to the company or management. Is management paying
exorbitant fees to the cousin of one of its directors? Is one of the company directors also a professional
collecting fees from the company?
 Management travel and perks – lavish travel expenses and other perks are often used as compensation when
the company does not want to show a large annual salary.
 Also included in expenses may be insurance, office supplies, utilities, rental expense and a number of industry-
specific costs. Pay close attention to the expenses that are listed in competitor financial filings but not in the
project’s statement.
 All expenses should be compared to sales, for the absolute level of the expense relative to sales and the growth
rate in the cost. Some growth in costs should follow closely with sales growth while others may not grow as fast.
Interest Expense – This may not be a factor if the company has no debt and does not plan on raising funds through loans.
If they do have debt or plan on raising funds, it is extremely important since your claim on the company’s assets and
earnings will take a back seat to any creditors in a bankruptcy. Even if no interest expense is listed, make sure investors
are not responsible for overly generous loan agreements with founders or management.

Taxes –Most startup companies will likely have losses in the first few years and not have a tax responsibility. A failure to
account for taxes even after years of growing profits is not correct either though. Make sure management is correctly
estimating potential taxes.
Net Income – This is what it all comes down to as an investor. Your investment entitles you to a proportionate share of
these earnings. Of course, management will likely decide to reinvest these earnings into growing the business but
eventually you will see your return. Earnings should be shown in a per share amount, according to the number of shares
issued by the company. Pay attention to the diluted share count which includes stock options and gifts to management
and related parties.
Helpful ratios
Margins – these represent the percentage of sales at certain levels of the income statement. Margins are the defining
measures of profitability and are a great check against management estimates. A great product and a strong
management team may be able to produce margins well above competitors but you should question estimated margins
that escape the realm of reality.
 Gross margin – this is the amount left over after sales minus the cost of supplies (cost of goods sold) then
divided by sales. It is the affect of the cost of materials on the company’s profitability. If this margin is much
Example Income Statement
Sales $100
Cost of Goods $35
Gross Sales $65
Gross Margin 65%
Operating Expenses
Marketing & Advertising $15
Staffing $5
Depreciation $5
Professional Fees $3
Overhead
Office supplies $3
Utilities $1
Insurance $4
Rental Expense $1
Travel Expenses $1
Total Operating Expenses $38
Operating Income $27
Operating Margin 27%
Interest Expense $0
Taxes $0
Net Income $27

higher than that of competitors’ it may be a sign of inferior materials used in production or of poor management
estimation. Smaller companies may not be able to get discounts from suppliers and may have a lower gross
margin.
 Operating margin – this is the amount left over after all operating expenses then divided by sales. It is one of the
best measures of profitability because it shows the operational efficiency of the company without the effect of
debt leverage. A lot of the analysis on the company’s operating margin comes down to each expense line item.
Operating margins will likely be lower for newer companies until they learn how to efficiently use resources and
cut costs.
 Net margin – this is the net income or earnings reported divided by sales. Beyond the operating margin, it
includes the effect of debt through interest expense and taxes on profitability. Again, it is important to compare
management’s estimate against competitors to check for realistic assumptions.
Valuing a project
Measuring the price per share against another metric like sales or book value is common in stock valuation but not quite
as common in startup financing because of issues like ownership dilution and lack of earnings. More common in
valuation are two basic calculations called net present value (NPV) and internal rate of return (IRR). Both measure
basically the same thing but display the results differently.
NPV is the present value of the investment, discounting cash flows by your required annual return. A dollar received five
years from now is worth less than today’s dollar because of the debasing effect of inflation. Your required interest rate
for a project depends on its riskiness and your own return needs to meet your financial goals. The NPV is the cumulative
present value of all the investment’s cash flows. If the NPV is negative, it means that the cash inflows (cash back to you)
were less than the cash outflows (cash you paid in) after discounting to present value. You decline to invest in negative
NPV projects because, according to the calculation, the project will not meet your hurdle for rate of return.
IRR measures all the cash flows of a project, inflows and outflows, and calculates a rate of return where the NPV is
exactly zero. If you make your NVP calculation and it comes out to be exactly zero, meaning discounted cash inflows
exactly match cash outflows then that is your IRR as well.
There are two important things to remember about IRR. First, if there are multiple periods of cash outflows then there
will be multiple IRRs and the measure may not be usable. Also, the IRR assumes that you can reinvest each year’s cash
inflow at that interest rate, an assumption that is normally not true. For these reasons, NPV is often the preferred
measure of return.
I have pasted an example below but you will likely need to read up on the subject a little to get the hang of it.
Most spreadsheet programs like Microsoft Excel or calculators will crunch the numbers for you. You input the cost of the
investment, either on a company-wide or an individual basis, in year zero and then the expected cash flows in each
subsequent year. If the company is expecting to start paying a dividend in year three then you would add that expected
cash flow in that year. Since most startups do not pay any kind of cash flow for many years, usually the only cash flow is
on the investor’s exit. This is either through a sale of the company or by cashing out the investor’s position.
 In the example below, you invest $600 in a project (year 0).
 You require a return of at least 10% annually on your investments.
 The project is expected to pay nothing until the third year when a $250 dividend is expected.

 You expect a dividend of $500 in year four and then expect to cash out of the investment for $1,200 in the fifth
year.
The PV factor is just a running percentage discounted by your required interest rate. The PV of cash flows is the cash
flows multiplied by the PV factor and the cumulative PV is just the addition of all the cash flow present values.
Since the project’s net present value is a positive $619 then the project meets your interest rate requirement and you
might consider investing. The IRR is 31%, assuming that you can reinvest the proceeds in year three and four and earn
that same rate.
Net present value will not tell you if one project is better than another unless you keep increasing the required interest
rate until one project’s NPV is negative. This is the reason some people use IRR also to compare projects.
There are libraries worth of books written on investment analysis and you will need more than what is written here to
fully analyze a project. If you are doing all the analysis yourself, I highly recommend going to your nearest library and
checking out the curriculum books for the first level Chartered Financial Analyst (CFA) exam. Some of the curriculum will
not be relevant, i.e. Standards and Fixed Income, but it will guide you through basic economic analysis and how to read a
company’s financial statements. It may seem like a long task but it will be worth it if you plan on investing your money
based on your own analysis.
Net Present Value (NPV) and Internal Rate of Return (IRR)
NPV - Choose project if present value is positive given your rate hurdle
IRR - Choose project if rate is above your hurdle rate
Interest rate 10%
Year 0 1 2 3 4 5
Cash flow -$600 $0 $0 $250 $500 $1,200
PV factor 100% 90% 81% 73% 66% 59%
PV Cash Flow -$600 $0 $0 $182 $328 $709
Cumulative PV -$600 -$600 -$600 -$418 -$90 $619
Net Present Value $619
IRR 31%

Understanding Ownership
You are buying an ownership percentage in a company when you invest in an equity crowdfunding project. The
measurement of that percentage ownership and what happens to it in the future is one of the most important but
neglected concepts in crowdfunding.
Important because that percentage ownership entitles you to a percentage of the cash flows from the company,
whether through dividends or when the company is sold. Neglected because investors usually fail to read the fine print
of company regulatory findings to understand what will happen to their percentage of the company later down the
road.
When a project gets listed on one of the crowdfunding platforms, it is seeking funds by selling ownership in the
company. For this it will issue shares, some of which will be sold to investors and some of which will remain with current
owners (founders) as their remaining share of the company. Equity crowdfunded projects are required to register with
the SEC before taking on investors. They are required to list a number of things including:
 Target offering amount, deadline and progress updates through the life of the offering
 Share price and methodology to determine price
 Description of ownership and capital structure, including detail on terms of securities and those of previously
sold securities. Detail on shareholder rights and dilution of shares
The problem is that startups often need multiple rounds of financing throughout the company’s lifespan. The initial
crowdfunding may just get business up and running. If the company wants to enter new markets in later years, it may
need more money and may need another round of financing. For this new round, it will need to issue yet more shares. If
it issued one million shares previously, those shares were entitled to 100% of the company’s profits. Now if it issues
another million shares, then the initial owners of the million shares are only entitled to 50% of the company’s profits
because there are two million shares in the total.
Besides issuing more shares through financing, companies can also grant shares to management as compensation. These
stock options and awards have the same effect of diluting current shareholders. Of course, the idea is that through
subsequent rounds of funding or by rewarding good management the company will grow and even a smaller percentage
ownership will be worth more.
If you are still not convinced of the importance of understanding ownership, a good example can be found in the movie,
The Social Network, about the rise of Facebook. Eduardo Saverin co-founded Facebook with Mark Zuckerburg when the
site was launched in 2004. Saverin’s initial ownership of the company was 30% but the company issued 24 million new
shares of stock in 2005. This caused Saverin’s stake to be a smaller percentage of the new share count, much less. After
the dilution, Saverin owned less than one percent of the company.
As I write this, that 30% stake in Facebook would be worth nearly $60 billion against a 1% stake worth about $2 billion.
Get the picture?
Unless you are a large percentage owner of the company, large enough to have a seat on the Board of Directors, then
there is often not much you can do about share dilutions or management stock awards. You are allowed to cast a vote if

one is held and can rally other share owners to vote one way or another but founders often maintain a controlling share
and control the vote.
For this reason, you absolutely must read through the project’s regulatory filing and understand your rights as a
shareholder. You may even seek legal counsel or an investment group knowledgeable on the matter. Multiple rounds of
financing and ownership dilution may be unavoidable, and may even be a good thing, but you need to understand how
and when the company is expecting to dilute your ownership.

What’s Next?
Investing or donating in crowdfunding projects can bring a host of benefits both monetary and emotional. The JOBS Act
is about to open up a world for regular investors that has been closed for decades but you need to be ready to take
advantage of that opportunity.
Supporters of donation-based crowdfunding projects might
look to be more involved in the project. If you read any of the
rules for projects above, you know how important it is for a
project to get everyone involved. If you truly believe in a
project, why not consider donating your time to the cause as
well. The emotional reward from actually helping the project
to reach its goal and then to carry out its mission could be
well above the reward you receive for your monetary
contribution.
For equity crowdfunding investors, a long path awaits you in analysis and investment. Depending on your background,
you may need to spend a great deal of time studying how to analyze the projects you find. You can always refer to the
Crowd101.com blog for ways to value a project and how to determine your own return needs and risk tolerance.
Done correctly, your reward will be well worth it. Double-digit returns are common in startup financing and every once
in a while you could find yourself owner of a company that returns multiples of your initial investment. Dick Costolo
invested $25,000 in Twitter when the company was raising money in 2007. Just six years later when the company sold
shares to the public, that investment was worth more than $10 million. That is a return of 400 times or an annualized
return of 272% every year for six years. Even one of these kinds of investments in a portfolio of a hundred projects could
make you a very happy investor.
I would love to hear your story and experience with crowdfunding. If there is a particular topic you would like to see on
the blog or if you have a question, please contact me. Send me an email to admin@crowd101.com
Good luck.

Crowdfunding Sites Reviewed
The crowdfunding revolution is happening across all 50 states, the District of Colombia and Puerto Rico. This is in
contrast to the statewide limits that still exist for the peer lending space where nearly half the states prohibit investment
on one of the major lending platforms.
Among crowdfunding sites, you have those focused exclusively on donation-based funding and those that allow funding
for an ownership right to the company. Until Title III of the JOBS Act is passed, only accredited investors with a net worth
of $1 million will be allowed to invest for an ownership. This doesn’t mean that regular investors cannot get to know the
equity crowdfunding sites and the landscape.
Gofundme.com
Claims itself as the world’s #1 personal fundraising website with more than $520 million raised as of November 2014.
The site is one of the few to not require a deadline or goal requirement. Projects receive all the funds donated. For
projects, this seems to be a pretty nice deal but I am not sure it is as good for those contributing funds. The requirement
for a goal or a funding deadline on other sites helps to force projects to develop a strong plan. Without this requirement,
there may not be the incentive to develop the business model or how the project will achieve its mission. Projects are
allowed to voluntarily choose an all-or-nothing plan where they must reach a funding goal but the plan.
Fees for projects include a 5% fee that goes to the website and a 2.9% fee for payment processing. That means you will
need to increase the amount your project needs by 7.9% to account for the money taken out. Gofundme is also available
internationally though fees vary by region.
Kickstarter
More than 72,000 projects have been funded with the help of 7.3 million donors and $1.37 billion in pledges since the
site’s launch in 2009.
Projects on Kickstarter are all-or-nothing with 44% of projects reaching their funding goal. Some categories are more
popular than others and have higher success rates in funding. Projects in dance or theater usually enjoy a much better
success rate than projects in technology or fashion. This may also have to do with the number of projects posted in a
category.

The site is pretty user-friendly for both backers and project owners with a lengthy FAQ page. The process of setting up
an Amazon Payments account to receive your funds seems a little longer than other payment services but is not overly
complicated.
Kickstarter charges a 5% fee on successfully funded projects and routes payments through Amazon. Amazon charges a
credit card processing fee of 2.9% and a $0.30 transaction fee.
Indiegogo
Launched in 2008, the site claims 7,000 campaigns are active at any given time and 275,000 campaigns since launch.
Idiegogo also allows project owners the option of not setting a funding goal and avoiding the all-or-nothing system. Fees
are different for the site’s ‘Flexible Funding’ plan though.
Indiegogo takes a 4% fee for all funded projects. While no fee is applied to all-or-nothing projects that do not reach their
goal, Flexible Funding projects are charged a 9% fee on their funds. The site offers two choices for payment processing,
Paypal charges a fee of 3% to 5% or funds may also be wired to your bank account for a $25 fee.
Registered charitable organizations receive a 25% discount on the platform fees of 4% or 9%.
Crowdfunder
The site reports 75,811 investors and 15,805 companies for $130.5 million in investments. The average size of equity
projects is $1.6 million, mostly through seed funding and initial rounds of financing.
Crowdfunder is an all-or-nothing platform and campaigns are recommended to set multiple rounds of financing. This
increases the likelihood that you will get funded through earlier rounds with smaller amounts but it also increases the
Project Category
Funding
Success Rate
Dance 68%
Theater 63%
Music 54%
Comics 50%
Art 45%
Film & Video 39%
Design 36%
Games 35%
Photography 32%
Publishing 31%
Food 31%
Crafts 30%
Journalism 29%
Fashion 27%
Technology 26%
Source: Kickstarter, November 2014

risk to investors. Companies looking for seed funding or proof-of-concept may still be years and multiple financing
rounds away from any sales or profits. Campaigns are able to set their own deadline up to the 60-day maximum.
A monthly fee starting at $299 is charged on all projects. Crowdfunder charges a 5% fee on successfully funded
campaigns. Payments are only offered through Amazon Payments which charges a 2.9% fee and a $0.30 transaction fee.
Realtymogul
One of the new crowdfunding sites dedicated to real estate investment, Realtymogul reports $36 million across 98
properties since its launch in 2013.
Crowdfunding real estate projects carry different levels of risk and return than start-up investing. Returns are not likely
to be as high but cash flow will likely be sooner and more regular. As with equity crowdfunding, only accredited
investors are allowed to invest until final passage of the JOBS Act.
The site provides a breakdown of property types for funded projects with residential and retail commercial properties
accounting for a large proportion of the total. The site also allows projects to raise debt financing through loans.
The site performs an underwriting check on projects to verify property characteristics and owners. Projects submit
investor cash payments to Realtymogul or to a third party payment processor which then remits the payment to
investors.
The minimum investment amount is $10,000 with a 3-10 year lockup period on most projects. Understand that you are
an investor in Realtymogul and not in the specific properties themselves. Realtymogul manages the fund of investments
and charges a 2% annual fee for administration.

Thank you
I want to take one last chance to thank you for visiting my site and becoming a part of our growing subscriber list.
Whether you are someone trying to raise money for your project or to become a longtime investor in one of the biggest
financial trends in decades, you’ve come to the right place.
The strength of any website or blog depends on the interaction with visitors and their support through passing articles
through their social networks. If a post is interesting to you, there is a good chance that your friends will find it
interesting and helpful as well. Please use the social media buttons on the left to share the articles with friends on
Facebook, LinkedIn and other sites.
I would love to hear your own personal story about crowdfunding. No matter how long or short, email me your
experience as an investor or as a borrower. I can omit your name if you would like and your information will never be
sold or shared with anyone.
Email your experience in crowdfunding or any questions to:
Admin@crowd101.com
Thanks again,
Joseph Hogue
Joseph Hogue, CFA
Crowd101.com Founder

7 rules you must know about crowdfunding

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