April 27, 2022

Three New Ways To Fund A Startup

Welcome to the roaring ’20s of startup financing. Aspiring business owners with a solid platform are turning to new and emerging trends for financing their dream projects. Three innovations of the last decade hitting their stride at the moment include the use of smart equity, NFTs and crowdsourcing platforms to fund a startup. If you are looking for creative ways to turn your side hustle into a business, consider the following methods.

1. Smart Equity

Smart equity is created when a homeowner uses the equity in their home to build long-term wealth instead of letting it sit idly by. In the last few years, the practice of fractional homeownership has grown more mainstream with the appearance of opportunities like lofty.ai and Cityfunds, which allow homeowners to sell a fraction of their home while maintaining full occupancy and primary ownership. This practice isn’t a loan and doesn’t create debt or monthly payments. Used properly, this method has the potential to eliminate many monthly payments that could burden a new business. If documented correctly as a founder’s contribution, it can also allow for the business to repay the founder with nominal interest as traditional funds are raised. For a homeowner with equity, this could be a better option than a HELOC and more practical than a full cash-out refinance, especially as interest rates rise.

2. NFTs

Nonfungible tokens (NFTs) have been creating buzz in many circles because of their multiple use cases and creative deployment. Creating an NFT won’t magically create wealth, but it is possible to create a community that supports your project and contributes financially. Approach the creation of the NFT series like a business by fully documenting all sales and building a project plan to support the community. Blockchains like Algorand and Solana are inexpensive to work with and have communities eager to teach newcomers how to create and interact with the population. An NFT can be a picture, GIF, song or can represent a membership or a ticket to an event. You can easily verify ownership of the NFT and start an owners’ club chat on Discord or Telegram, where you can directly message and cultivate a strong identity and brand following. Selling an NFT is just like selling any other product. There are modest costs associated with its creation, and some thought needs to go into the benefits you will extend to owners. In most cases, the NFT does NOT convey ownership in any company, and some research is recommended to make sure that all local regulations are followed.

3. Crowdsourcing Platforms

Thanks to the SEC’s 2016 enactment of the Regulation Crowdfunding portion of the JOBS Act, the majority of Americans can now invest in startups without being an accredited investor. Sources like Republic and Wefunderhave made this process easier in that prior to issuing any stock, and these sites enable the issuance of SAFE notes, which serve as an option to own shares in a future round. SAFE notes are convertible equity and have no loan or maturity date involved, so a new business isn’t saddled with monthly payments or debt at an early stage. These SAFE notes do convert to equity at some point in time, so it is important to set a proper valuation and term that you will be comfortable with and will be appropriate in the future.

A Few Special Considerations

The ability to raise funds in an unconventional manner can also lead to some unconventional problems to look out for. If you decide to sell a fraction of your home, make sure that your title work and homeownership are clear. If you currently are married or have multiple people on title, you should ensure all parties are available to sign and aware of the transaction. If you decide to sell NFTs, you will need to create a cryptocurrency wallet and have a plan to remove funds and convert them to traditional currency. And if you are considering a crowdsource platform, then you may want to hire an attorney to review the company structure and plans for a future public offering and help you prepare to give up equity in the company.

These options are all unique, offering their own pros and cons. The one commonality held by all three methods is that none of them were available ten years ago. All three may also appeal to startups as exciting alternatives to traditional finance or asking friends and family for seed money. Taking a first entrepreneurial step can feel like venturing into the unknown, but having a solid plan as well as options can make the process much easier.

Written by

Sundance Brennan