Crowdfunding for Restaurants
As the number of restaurants continue to grow, so do the number of different ways restaurants get funded. We are all likely familiar with the traditional methods; banks, private equity, IPO and friends & family, but in recent years, restaurants have begun exploring a new way to raise capital: crowdfunding.
Using the crowdfunding model for restaurants - be it for expansions, new projects, or simply to get off the ground - serves a dual purpose. First, it allows restaurant owners, or entrepreneurs looking to break into the restaurant business to effectively raise capital, which can be hard to come by.
It also helps to promote the business among a loyal customer base before a project or business is even launched.
How can donors, on the other hand, benefit from contributing to a crowdfunding campaign for restaurants?
There are three main drivers behind why an investor would participate in crowdfunding: - rewards, equity (or investment), or to provide debt to the restaurant and expect a payback based on a pre-determined interest calculation.
Reward-based crowdfunding gives investors an opportunity to receive an incentive for their contribution. For example, if you donate $50 to a project, you might receive a coffee mug or a gift certificate.
Equity-based crowdfunding allows investors to become true stakeholders of a restaurant. These investors will become partners in the business and share in the profits/losses. Having an equity position in the company also allows investors to sell the investment at a later time, hopefully for a profit.
Debt-based crowdfunding allows investors to make loans to restaurants. In these scenarios, debtors come to the table with capital and a pre-determined interest rate, and the business can decide whether or not they are interested in taking the money from that party.
There are a number of platforms that restaurants can use to develop a crowdfunding campaign. For instance, well-known platforms Kickstarter and IndieGoGo are global crowd-sourced fundraising sites that help organizations collect funding and provide donors with thank-you gifts. A newer crowdfunding platform, EquityEats, is geared toward restaurants specifically. EquityEats also differentiates itself because investors receive an equity stake
alongside typical investment-based perks.
In all crowdfunding situations, it is very important that the restaurant receiving the funding has legal counsel and ensures that all documents are clear to the investors in order to avoid any confusion as to the investors rights.
Have questions about crowdfunding for restaurants? Keep up with the Practice’s latest thoughts by following us on Twitter at @BDORestaurant