An ambitious new equity-crowdfunding player for Finland and Sweden-based startups has opened up publicly today. Invesdor seeks to lower the barriers to raising and buying equity, and to do so they've interestingly thrown away "tedious contracts" like the shareholders' agreement in favor of flat, free floating shares. By doing so, they're not not playing by the standard rules or raising equity, which has both its benefits and consequences.
Invesdor focuses on seed rounds under €100 000, with the minimum investment only €20. When running a financing round goes larger than that size, European securities regulations regarding how many people can view the details of a funding round come into place, so Invesdor attempts to avoid that issue. There's apparently a possibility for larger funding rounds to be supported, but you must get in contact with them.
On the business model side of things, Invesdor charges a 5% success fee to startups after a successful round has been completed. And in 2013 they will begin charging €99 per month for an "Investor Channel" which is a Facebook or Yammer-type feed an entrepreneur can use to get in contact with his shareholders after the funding round has been successfully completed. Chairman and co-founder Lasse Mäkelä points out there is value in this channel as one of the benefits to having so many shareholders is that they act as an international advisory board for your company.
As a form of quality control, an entrepreneur must invest at minimum €200, or the price of one share, into their own company. Investors must pay a 3% admin fee on top of what they're investing, capped at €300.
My main questions with Invesdor involves how they've completely doing away with any sort of shareholders' agreement or term sheet. I talked for some time with Mäkelä on this issue, who firmly believes that this is the future of equity crowdfunding. By democratizing the process it makes everything informal and easy for both the shareholders and entrepreneurs.
"One advantage is that if you are an entrepreneur, if you sell the same class of shares that you have, both you and your investors are on the same level," says Mäkelä. "The investment process is democratized. You don't have a business angel that can get lots of repo rights and special rights, or uneven distribution of the payout. For an entrepreneur it is a very advantageous way of getting financing."
But for disadvantages, a quick exit is tougher, as the entrepreneur must buy back or squeeze out, the remaining shares, as detailed in Finnish or Swedish law. "Some angles may view it as more difficult if they are thinking of a quick exit, but we believe [flat shares] is the direction crowdfunding is going all across the world."
Another issue I have is what happens to your shares if a company you invested in later takes financing from a more traditional Angel or VC. Without your name on a solid shareholders' agreement, I'm fairly certain further VCs and Angels will act in their best interests and make it a lot tougher for your shares to hold value or to exit. It's uncertain what rights your shares will have in further funding rounds, and it's a lot tougher to cash out if your shares are unprotected by drag-along provisions.
I also asked what further institutional investors will think of a funding round run through Invesdor, and Mäkelä responded, "I firmly believe that crowdfunding is coming. It's coming to the US in 2013, and It's going to be a big change. This market will be changed. The old method where business angels can dictate what rights they want to have in shareholders agreement, that whole process will be democratized. This may mean that angels may not like this so much, but it's coming."
Not signing any sort of agreement also feels funny, because how do you know exactly what you are getting? Mäkelä tells me the way Finnish law is set up, the act of paying the subscription price of shares makes the agreement you are buying those shares. Your name is updated to the company's shareholder's list, and your bank's receipt of payment is proof enough apparently.
Rather than plugging into the standard funding ecosystem, Invesdor is attempting to create a new, flatter and democratic system of financing, which is honorable. But investment rounds, even on a smaller scale like this, are still a huge financial transaction. Crowdfunding involves convincing a ton of people that both a company and your crowdfunding platform are a great place to invest, so I'm curious if this lack of friction from paperwork will actually ease or hinder the investment (and exiting) process. The wisdom of the crowd will decide, I suppose.