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Planning successful crowdfunding

Crowdfunding can prove your business idea is viable and build customer loyalty before you begin.

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  • Crowdfunding
  • Structure your crowdfunding
  • Get started

Use this simple planning guide to make sure your crowdfunding is a financial success.

Plan out your project

Before you even think about a crowdfunding project you need to know how much money you will need. Developing a detailed project budget with a contingency amount will help. If you are successful in raising the money, how will your supporters feel if your project goes over budget or you run out of money and fail to deliver? Good project planning and management is critical.

What will you give in return?

Most crowdfunding projects give something to those who support the project. Will it be products or services? Will it be an equity interest? Will the money be a loan and get repaid? Are the funds simply a donation?

If you are going to give products or services in return for the money received, you should make sure that those costs are budgeted and planned for. You don’t want to find yourself in the situation where the rewards cost more than what you’ve received.

Are you a business for tax purposes?

The first place to start is to determine if you are in business at all. If your project is a hobby, then there may not be any GST or income tax implications for your crowdsourced funds. Check out the Australian Tax Office (ATO) site for more information about whether you are in business.

Is the money a donation?

If you are in business, what you give in return for the money received will help to determine the tax issues. If you treat the money received as a donation to your business then there could be GST and income tax issues, as it is likely that the money will be revenue. The cost of providing any rewards (say goods or services) should be a tax deduction.

A donation to your business by an individual will generally not be tax deductible to the person making the donation. For funders to receive a tax deduction for their donation, your business will need to have Deductible Gift Recipient (DGR) status with the ATO. Generally DGR status is reserved for not-for-profits, charities and community organisations. It is highly unlikely that the ATO will grant DGR status to your private business.

It is important that you seek GST and income tax advice from your accountant or adviser before you start to raise funds for the project, so that any cash flow implications can be built into your project budget. You don’t want to find out that you owe GST and income tax after you have used all the money.

Are you asking for a loan or offering equity?

If the funds received are treated as debt or equity, it is unlikely that GST or income tax issues would arise. However debt and equity present other issues. If the money raised from crowdfunding is treated as a loan, then at some point the debt will need to be repaid, with interest at a rate agreed between the parties.

Given the amount of people involved this could be an administrative nightmare. If the money raised is treated as equity, then you are effectively 'selling' part of your business to those who contribute funds.

This poses a whole range of complex issues including:

  • does your structure allow you to sell equity (if you are operating as a sole trader, partnership or discretionary trust you may need to look at re-structuring into a company or unit trust)?
  • are you willing to give up a proportion of future profits or business value to others investing in your business?
  • how will you determine the value and percentage ownership interest for each investor?
  • if there are a large number of funders, how will you manage your share register?
  • will you need a shareholders' agreement? This deals with who gets to be a director, when dividends will be paid, how shares will be valued in the future, and who shareholders can sell to.

Generally money is raised through a crowdfunding website such as Pozible or OzCrowd. However, you'll need to have a marketing plan and social networks to raise awareness of your crowdfunding.

Set up a campaign 

The Australian Securities and Investment Commission (ASIC) administers the law around raising equity and there are serious consequences for breaching the law. If you are considering this option, then you should seek advice from your accountant and lawyer before you start to raise funds.

Case Study: Crowdfunding John Gorilla

'Connect with your community - if you're not already using social media, get onto it before you start your crowdfunding project.'

Joanna Wilson and Nic Kocher, John Gorilla

Read more about the power of social media and networks.

Joanna smiling leaning out the front window of the cafe, leaning on her elbows