Created by the JOBS Act, Regulation Crowdfunding allows startups to raise up to $1 million per year from an unlimited number of investors, no matter how wealthy they are. This law gets rolled out May 16th, 2016.
Investors are also limited in the amount of capital they may invest in Regulation Crowdfunding startups per year. To calculate your investment limit, first choose either your net income or net worth - whichever is lower. If the lower number is over $100,000, you are allowed to invest 10% of it each year. Otherwise, only 5%. For instance, if your income is $96,000 and your net worth $200,000, you'd be legally allowed to invest $4,800 per year in startups.
In our experience, most investors in startups are investing in their confidence of a concept and the team’s ability to execute it. Wefunder provides a platform for startups like Block Chaser that are looking to raise money under the new Regulation Crowdfunding laws. One common method on Wefunder is to utilize SAFE standards, which stands for “Simple Agreement for Future Equity.” It allows investors the right to purchase equity at a future date. SAFE is not a loan and as such, it does not accrue interest or have a maturity date. SAFE is similar to traditional convertible debt and ideal for equity-based crowdfunding. When a SAFE investment converts into equity, the exact share price and how many shares each investor gets will then be calculated.
One of the most common reasons many businesses raise funds using SAFE and/or convertible debt is because it is not realistic to put an accurate value on a business in its infancy. When an early valuation is too skewed in favor of the investors or the founders, the end result is a problem for both parties. Instead, it is best for both parties to be committed to each other and value the business when it can be done appropriately.
The valuation cap is a term in a Convertible Note or SAFE that puts a ceiling on the conversion price. It rewards the first investors more appropriately for the extra risk they took by investing early.
For example, let's say you invest in a startup with a convertible note that has an $8 million dollar valuation cap, and, one year later, the startup raises their Series A at a $20 million Pre-Money Valuation
Without the valuation cap, your note would convert into equity at the $20 million valuation. But with the cap, your note would convert as if the valuation was $8 million, giving you more equity at a much better price per share than the venture capitalists that just invested.
For more information and other answered questions, go to https://wefunder.com/Blockchaser and scroll down to the Details section.