Crowdfunding: A Guide to Raising Capital on the Internet

CHAPTER 9

Alternatives to Crowdfunding

David R. Burton

The Heritage Foundation

This chapter addresses both legal and business aspects of raising capital by means other than crowdfunding. To be sure, there are many alternatives. The method a business uses to raise capital and the type of capital raised will be a function of the situation the business and its owners are in, the amount of capital to be raised and, to some degree, what prospective investors find most comfortable. Some preliminary issues that any new business should consider are briefly discussed as well.

Basic Types of Finance

Business investment falls into two basic categories: equity and debt. Equity owners, as a class, control the business and are entitled their share of the company profits, but are typically only paid if there are profits. Holders of debt typically receive a specified return whether or not the firm is profitable. Thus, issuing debt can increase the risk of business failure.

Debt

Debt is incurred when a business receives funds (the principal sum) from a lender in exchange for the obligation to repay those funds with interest within a specified time (the term) on a specified schedule (the payment schedule). The debt may or may not be “secured” or “collateralized” by property that may be sold by the lender to satisfy the debt if it is not repaid in accordance with its terms. Accountants and banks consider certain leases to be debt even though they are not legally debts but contractual obligations. ...