10 Things to Know When Preparing to Crowdfund

1. Create a Business Plan and Budget. How much do you really need to crowdfund to get your business where you want it to go? A smart approach to equity crowdfunding is to be prepared with all the details from the start. When budgeting, make a future projection and consider whether the business needs to itemize new employees, consulting costs, branding (e.g., a website), manufacturing, etc.

2. Consider ‘Raise’ Fees and Expenses. Nearly all crowdfunding platforms will require due diligence and vetting fees for required compliance services like background checks. Also expect to pay a small percentage (5-8 percent) of the total raise to the platform to cover costs associated with hosting the campaign on the platform. 3. Select the Platform That Best Suits the Company’s Needs. Be sure to research crowdfunding platforms before committing to launching a campaign on one. Choosing the right platform is advantageous when considering the business’s exposure to a larger pool of investors. Research a platform’s management team and look for their experience in the crowdfunding community.

4. Keep Realistic Expectations. When starting this process, keep the phrase "If you build it, they will come" in mind. That means it first actually has to be built, so don’t expect hordes of adoring investors to come knocking at your door just by virtue of posting your crowdfunding project online. There is a significant amount of planning that goes into the application process and the actual capital raise.

5. Build a Strong Network. Start with friends and family. They are going to passionately explain the venture to others because they believe in you and want you to succeed. If all of the donors share the story with the same enthusiasm, the network will grow exponentially. If the business is a service, consider inviting customers and clients to become investors.

6. Listen to the Wisdom of the Crowd. Crowdfunding will not only revolutionize the capital-raising process for entrepreneurs, but also usher in an unprecedented era of transparency and “groupthink.” Having a great idea is not enough — ensure that the company you’re investing in has a solid business plan and that the owner’s family and friends have already pledged to invest.

7. Consider Investing in Local Projects and Companies. Investors in a local community know market conditions, the people behind the company and how the project will positively impact their area better than anyone else.

8. Mitigate Risk and Exposure. Though the thought of investing in the next Facebook Inc. or Microsoft Corp. is an alluring idea, the time-tested wisdom of diversifying investments applies more than ever to equity crowdfunding.

Since these types of investments carry higher risks than regular equities, spreading out investments is a wise choice. On the plus side, however, many equity crowdfunding platforms do not charge brokerage fees.

9. Invest Through a Reputable Platform. Since the JOBS Act was passed in the U.S. nearly a year ago, hundreds of websites have cropped up purporting to be equity or other types of crowdfunding companies. To be clear: if a company is advertising that it currently has fantastic opportunities for investors, this is in violation of the law and a scam. Nearly all accredited crowdfunding platforms have participated in the Crowdfunding Accreditation Platform Standards (CAPS) program and will display this seal on their website.

10. Read and Watch Everything You Can About the Industry. Investor education is important to everyone in the equity crowdfunding space, and regulators have stressed this component of the JOBS Act as well. Many crowdfunding websites have important FAQs sections and knowledge centers to learn more about the differences between traditional and crowdfund investing.

Educating oneself before jumping in is key.

Stephen Temes, cofounder and chairman of EarlyShares.com, is a trader with more than 25 years of experience in equities markets and trading options. EarlyShares will help bridge the gap for small businesses and entrepreneurs through equity crowdfunding, starting in 2013.