Crowdfunding Models

Crowdfunding is the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media.

Crowdfunding Models

The Donation Model: Individuals make a financial contribution to a project without any expectation of a financial return on that contribution. Projects and platforms that employ the donation model typically also use a reward or incentive system to help stimulate contributions whereby contributors are thanked for their support with a small reward. Rewards or incentives vary from recognition in the project’s credits to branded merchandise or opportunities to meet with creators and/or attend special events such as a launch party or premiere screening event. Rewards or incentives often increase in number and/or value in accordance with the amount of the contribution being given.

The Lending Model: This crowdfunding model is similar to any typical lending scenario, where individuals lend money to a project or company with the expectation that it will be repaid. In the context of crowdfunding, the lending model can take a number of forms, such as:

  • A traditional lending agreement – standard terms are used and there is an expectation for a monetary reimbursement in the form of interest. In this case, the loans may or may not be guaranteed, depending on the crowdfunding platform being used.
  • A forgivable loan – contributions are reimbursed to the lender only if one of two possible conditions is met: a) if and when the project begins to generate revenue or b) if and when the project begins to make a profit.
  • Pre-sales – the finished product is promised in return for the contributor’s pledge. In the case of a pre-sale lending model, the contribution amounts are determined according to an assessment of the fair market value of the product. In addition, larger contribution amounts are typically accompanied by a promise of more copies of the product equal to the value of the amount of the contribution. Pre-sales are often combined with a rewards-based donation model.

The Investment Model: Resembles a standard equity investment, where an individual receives equity in an entity in return for financing. There are two standard sub-categories of Investment Model crowdfunding:

  • Securities Investment Model – shares in the company are bought by investors. In this model, contributors would be buying ownership in the parent company or rights in a project.
  • Profit or Revenue-sharing Model – a share of the revenue or profits of the project is earned by investors, as opposed to shares in the underlying company. This is also known as a ‘Collective Investment Scheme’.

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