Image | Reid Hoffman

“Greeeeat!” is more or less what the startup and investor sector must have thought last week when the government gave the green light to the draft with a significant alteration: the limit for raising money by way of alternative financing (crowdlending and equity crowdfunding) was raised to 5 million euros. When the original draft was announced the ceiling was set at 1 million euros. Even though such initiatives seldom ask for such a large figure, the ceiling was seen as an unnecessary limitation: another attempt by the government to regulate the free will of the Internet.

The law is now done – although it still has to get through the senate to be officially in the BOE (official state bulletin). So it’s time to look more closely at the question: What is crowdfunding and why could it be a good alternative for startups seeking financing?

We’ll go through it point by point.

The origins: from banks to the Internet. Not so long ago, if you wanted to finance a small business your only options were to go to a bank or an investor. If the project involved technology, especially groundbreaking technology, and the banks and investors didn’t understand it, the project had problems. With the rise of the Internet, platforms were born that allowed the cost of a project to be shared between a large number of people who believed in it, this was dubbed crowdfunding. But many didn’t like the fact that money was just donated: It wasn’t a loan to be be paid back or an investment that would pay off if the business prospered. Equity crowdfunding was born to alleviate this problem: those that pledge money become investors.

I have a startup and I need money! Where do I go? There are various equity crowdfunding platforms: Seedrs, The Crowd Angel and Crowdcube are among the most well known. The process is similar to crowdfunding. You put up your project, launch a “campaign” both on the crowdfunding platform and on social networks, to attract investment. Those who invest participate in the capital of the business. Each will have its own rules and tariffs.

How much can I ask for? In Spain, up to 2 million euros if there is a mix of accredited and non-accredited investors (more on this next) and up to 5 million euros if it is only accredited investors that invest in your project.

Who puts down the cash? The majority of European laws distinguish between, accredited investors (porfessionals) and non-accredited investors. Accredited investors don’t have limits on their financial assistance, as it is assumed that they are professionals and, as such, know what they are doing with their money.

What do I give in exchange? In contrast to traditional crowdfunding, here the company gives participation in its capital. As explained in Wikipedia, “ with a return in the form of benefits, income, shares or participation in the firm. It is a way to find a base of multiple partners who will make up the capital”

When, how and why? Equity crowdfunding is one more option to raise finance for a startup and there have already been several success stories in Spain. SocializeMe raised 90,000 euros on Inverem and La community raised 105,000 euros on Bihoop. Is it the definitive path to financing? No, it is one way more, and one that unites friends family and fools (those whose are the most likely to give money to get a project of the ground), business angels and seed capital ( for when the project is taking its first steps) and investors of venture capital (when the project grows and expands).

I’ve heard talk of crowdlending. What is it? Alternatively, there is crowdlending or P2P lending (peer-to-peer lending): instead of going to a bank, users of this scheme give money in exchange for an agreed interest rate. This is used more by SMEs or established businesses that don’t wish to go to a bank but have enough stability to be able to guarantee the money. If you are a startup and need initial financing, this isn’t exactly what you are looking for.

New types of startup financing: the role of equity crowdfunding

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