#183 – Equity crowdfunding for startups: Challenges, ethics, and rewards | Zac Henderson & Ben Grynol

In the startup world, what is it like to supplement a standard Series A round with equity crowdfunding? Ben Grynol & Zac Henderson offer their views on the experience and share the lessons they learned from its challenges. The Levels team did not anticipate the support received from individual investors who believed in the company’s mission and wanted to be part of the Levels journey. Look for multiple new shows per week on A Whole New Level, where we have in-depth conversations about metabolic health and how the Levels startup team builds a wellness movement from the ground up in the health and wellness tech industry.

Zac Henderson (00:06):

I think all of us were reading those comments for the whole next week, and just feeling so humbled and gratified because, as you say, in addition to saying go for it, Levels was excited to invest, you’re getting snippets of the effect that we’ve had on people’s lives and the effect that they hope that Levels will have on the lives of their friends, and family, and others. It was hugely emotional. I remember Josh Clemente, one of our founders, just talking about how he literally spent hours reading those comments for days after it because they really served to focus in on the mission that we all have here. When you’re at a startup, you’re working hard, you’re doing a lot of work heads down. If you are able to have a moment where you really hear from a member and it can help focus your direction, it’s a real gift. And what we had in those comments and through this crowdfund was that, and just concentrated to a pretty unimaginable degree. I think many of us are, to this day, doing our work with those investors and those comments in mind.

Ben Grynol (01:17):

I’m Ben Grynol, part of the early startup team here at Levels. We’re building tech that helps people to understand their metabolic health, and this is your front row seat to everything we do. This is a whole new level.

(01:43):

When it comes to startups, a couple things are true. One, you never know how it’s going to work out. Two, if you keep going, you’re very likely going to have to raise money. Well, in the case of Levels, we’ve raised a few different rounds. In October of 2020, we raised our seed round, and in September of 2021, we started our series A process, that being a larger round at a higher valuation where we’re working with institutional investors. Those are people like venture capitalists who do it for a living. We raised another round of capital. But when we went to go do our Series A, we thought, hey, why don’t we try this other thing called equity crowdfunding, where we can open up some of the allocation, some of the capital that we’re willing to accept, and open that up to people in our community, those being Levels members, people who have been along this journey with us, and see what happens.

(02:31):

Well, much to our surprise and in a very humbling way, the community showed up. People came and they supported in droves, and it was something that was totally unexpected to us. We didn’t expect to have as much support as we did. One of the 1400 people said, “Hey, we want to invest some money,” checks as low as a hundred dollars, and it was amazing to have that support from the community. It was very much an effort that we all contributed to as a team to put together this campaign, and we thought it was going to take weeks to close. It ended up taking 77 minutes to get the first allocation filled out.And so Zac Henderson, head of legal, he ran point on most of the process, all the due diligence that was required to not only run an institutional round for regular fundraise process, but also the crowdfunding component simultaneously, something that most companies haven’t done together out in time. It was a bit of an interesting experiment, which we love to do, but we learn lots in the process. So Zac and I sat down and we went through the story, some of the feelings that we had internally and some of the process that came into play when we did this equity crowdfund.

(03:37):

It was really fun to retell the story, to think through some of the things, and even get tactical. What are some of the ways that young companies, or people that are thinking about raising money, what can they do moving forward? Should they do equity crowdfunding? Should they go the institutional investor route? Should they do both? Anyway, there were a lot of things that we were throwing back and forth, and it’s always important to remember this is not investment advice. This is us retelling our story of Levels. So no need to wait. Here’s the conversation with Zac.

(04:13):

Okay, we should rewind all the way back to some time that feels like it was 10 years ago, but it was probably six months ago. It was some time ago. We went through an interesting process for raising our series A, which was equity crowdfunding, and you were running point on basically the whole thing. So I thought it would be good to go into the narrative and recap what exactly happened, how it felt, and I think it was pretty emotional for all of us to see the way that it unfolded, knowing that it didn’t really end up the way that we thought it would.

Zac Henderson (04:43):

Yeah, it was both an incredible experience and definitely a more challenging one than we anticipated. I think initially we had the thought that the crowdfunding component of our series A would be something that we would probably be able to wrap up in a matter of weeks. And just the way everything plays out, and the way the rules work, and some of the requirements that we had to adhere to meant that the crowdfunding actually ran for something like three months from start to finish. So it was a long ride both for us and for our members who invested, but we ultimately did end up exactly where we wanted, which is we were able to have over a thousand of our members actually invest directly in Levels, which was pretty great.

Ben Grynol (05:27):

So let’s rewind all the way to, gosh, was it August? August of 2021, when we decided to start the process. I think it was around there. We were starting the process August, September. We thought, hey, we’re going to raise a series A. That’s around the time when we made this decision. And it would’ve been September, I believe, that we said, “Why don’t we do this equity crowdfunding component?” Because we’ve got a super engaged community. Let’s open up some allocation to them as opposed to traditional institutional investors, which we’ve got a great suite of them and they’re very supportive, but we wanted to do it from the community support perspective. And so then it unfolded into this massive thing. Was it September? Now I’m trying to remember.

Zac Henderson (06:08):

Yeah. I think September is where it kicked off. I joined the company, I think, August 9th, and it was within a week or two that I was ramping up to help us get the series A going. So yeah, I think it was September that we made the firm decision that we were going to make crowdfunding a part of our series A, and the ball basically got rolling from that point forward.

Ben Grynol (06:30):

That’s hilarious. I totally forget the timeline because I forget that you even started in August. It feels like you started nine years ago. But let’s go through that. So we opened it up, let’s just call it September one. We started this process, let’s call it September one. We opened a process with institutional investors to raise a Series A. We opened up this idea of equity crowdfunding. Let’s walk through what exactly that felt like as far as putting together the materials, engaging the community, how we went about it.

(07:01):

And then we hit the big green button that hit send to the community that said, “Hey, we’re doing this thing.” Let’s get maybe the narrative behind once you were involved, so two weeks in, you’re ramping up with onboarding, with … There’s Levels, which normally for the first four weeks, we don’t really do work. But in the first two weeks it’s like, “Hey, Zac, all the stuff that we haven’t done pertaining to legal, here’s a bunch of stuff that’s high priority. By the way, there’s this other ancillary thing going on the side in parallel, equity crowdfunding. You want to own that, too.” It was a bunch of stuff dumped on you. But let’s go through this whole narrative of how it all happened.

Zac Henderson (07:40):

Yeah. It was an amazing experience. It was a whole lot. I knew that joining Levels would be the ultimate drinking out of the fire hose because we move quickly, we do a lot, and we’re really committed to being above board. And that means paying attention to the legal and regulatory side of the house fairly early on as a company. So we got our series A start at the beginning of September. And, Ben, as you said, we already had this stable of really interested investment from more traditional investors. And by traditional, we mean angel investors, venture capital firms, et cetera. So much interest, in fact, that we actually, for the whole duration of our series A, ran a pretty deep wait list of people who wanted to invest.

(08:24):

So we didn’t do the crowdfunding component as a means of gap filling, which is a fairly common use to run a crowdfund. We really took the mindset that, as you said, we wanted our community to have the opportunity to be engaged in this process. As a company, we probably rely upon our traditional investors more than others for advice, for potential leads on hires, all of that kind of stuff. We had the idea that our members would probably be able to offer us similar leads on potential hires, and just keeping their interest high in the company was valuable.

(09:02):

So we got these processes more or less started at the same time. What that basically involved was working with outside council to do our standard regulation D fundraise, but also getting the process started on regulation CF, which is an entirely different kind of way to raise money that actually, the rules around that fairly recently changed, and that’s what actually opened us up to being able to bring our members in.

(09:29):

The interesting thing, though, is because this shift in the crowdfunding regulations were fairly new, we really did trail blaze. There aren’t too many companies that did this thing where, in addition to doing a traditional fundraise, they invited their members to do the raise, as well. What’s what led to some of the distended timeline. We really were one of the first companies doing this really cool thing.

Ben Grynol (09:53):

The approach is usually a binary outlook where it’s like we’re going to do crowdfunding or we’re going to do institutional, assuming that a company’s past friends and family round, seed round. For a Series A, it’s very clearly in most cases going to be institutional money coming in. And so we had this blended approach, which was really interesting. Let’s paint the picture, too, to give context for what it means to have investors because opening up crowdfunding, it was about the idea of having people involved. That’s what you mentioned, it was involved. So typically, in a friends and family round, maybe a seed round, the checks are going to still hit a certain size, but you might take checks. Let’s disregard friends and family around. Let’s say for a seed round, you might take checks as small as 10,000 bucks. That’s still a huge amount of liquidity for anyone to have if you are not typically an institutional investor.

(10:50):

As you get into series A, there’s usually a minimum check size, which might be like a hundred grand. It depends on what you’re raising at what valuation. What do you actually want as far as your cap goes? But there’s going to be a minimum check size. And what we said is, well, what if you can invest a hundred bucks in Levels, would you do that? And so by changing the access to being able to be involved, to feel really part of a company was what the game changer was. And so that’s what happened with the crowdfunding component where it’s like, hey, what was it? I can’t remember the max. What did we say the max was that you could do? There was a minimum a hundred, max was 10 or 20?

Zac Henderson (11:29):

Yeah, I think we’d set the max at 25. A bit of a spoiler, but the crowdfund was actually so successful that in order to allow everyone who wanted to invest into the round, we ultimately kept pushing that max lower and lower to fit more people in. Because it turns out we had a whole lot of people who wanted to invest at that $25,000 amount, but if we let everybody who invested the max do so, then a bunch of people would’ve been left out. So I think the actual max ended up being pushed down to something like 13 or $14,000. So that was roughly our range, as little as a hundred dollars and up to something like $13,000 were able to invest in the crowdfund

Ben Grynol (12:10):

Yeah, because the equity crowdfund component can only be a total percentage of your raise.

Zac Henderson (12:17):

It’s a firm cap actually at five-

Ben Grynol (12:19):

Oh.

Zac Henderson (12:20):

So this is one of the things that’s new. The SEC has adjusted the cap, so it’s a $5 million hard cap. That’s the amount of money that you can raise every year under a regulation crowdfunding raise. I’ll just jump in and say that led to one of the probably most emotional and exciting parts of the raise band. I think you remember, we were all there on Threads, which is our main communication platform we were using, and we opened up this round. And we start off with a $2 million cap.

(12:53):

Our thinking was we don’t want to do the $5 million cap because if only a million and a half dollars worth of investment come in, we don’t want to have all of this extra bandwidth. How will our institutional investors do that? How will company morale be if we raise this round and we don’t fill it? Well, we were completely wrong about that because within something like an hour, we’d hit the $2 million artificial cap that we’d set. We raised the cap to the actual regulatory max of five million, and that filled up within a matter of hours in terms of reserved investment. So short story there, but the hard cap was five million, and it didn’t take us long before we had investment reservations for that total amount.

Ben Grynol (13:34):

Let’s rewind to this process to get to that point because that was pretty cool. We decide to undertake this thing. We’re raising our series A, we decide to say, hey, let’s do this equity crowdfunding component. We all contributed and aggregated these materials because there’s a certain due diligence process for our data room, the nerdy way of saying it, a bunch of materials that tells people about what your company does and gives some transparency into performance. That being like what is your revenue, what’s your burn, giving people the information they need to make a conscious decision about whether or not they want to participate in a round.

(14:11):

So we did this, this stuff, we chose images, we wrote copy, we did all these things, and it goes on some page. We worked with Wefunder, we did it through Wefunder. So people would get this page, they would see this through an email that goes out, and they say, “Cool, I’m in.” So we did this. It takes, let’s say, a couple weeks you’re working with the team. Fast forward to us sending the email, and that’s where it was really interesting is that we hit send, “Hey, do you want to participate?” And it was just like … I can’t remember. What did you say it was, 77 minutes?

Zac Henderson (14:41):

I think that’s right. It was 77 minutes until the cap that we’d set was completely full, and we had to reach out to Wefunder, the platform that we were using to facilitate all of this, and we had to say, “Hey, can you please go ahead and bump the maximum from 2 million to 5 million? We’re already full.” And they did so, and it didn’t take long after that before even the $5 million cap was hit. And in fact, we had reservations for investment up to the six and a half million dollar mark that we ultimately pared down when we closed the round. That’s that process we discussed of having to lower the cap to fit everybody in. But we had far more interest in investment than we were even able to facilitate under the rules.

Ben Grynol (15:24):

And the number of people was the bonkers part because two and a half million fills up pretty quickly if checks are 25. It just does. But we have … I can’t remember the exact amount. It’s somewhere around 1139, there’s some … let’s just call it loosely … Do you remember off the top of your head?

Zac Henderson (15:42):

I would’ve to go and see the exact numbers. But I think all told, when it finally wrapped up, I think we were closer to 1400.

Ben Grynol (15:48):

It’s wild.

Zac Henderson (15:50):

Pretty incredible number of individual investors who … Again, the thing that I love about this so much and that I think hit us all in the gut, it is one thing, and still a wonderful thing, to have institutional investors believe in your company so much that they’re saying, “Hey, we have investment dollars and we’re going to put them with you, Levels, because we believe in your mission, and we believe that you can be a commercial success.” That’s wonderful. But that is nowhere near how it feels to have one of your own members who have used your product, they’ve used it, and they reach out and say, “Yeah, I’ve used this. It affected me so much that I’m going to actually invest in your growth because after me using it, I continued to believe in you.” And that’s what we had something like 1400 times over. It’s hard to talk about it without almost getting emotional. It’s really remarkable.

Ben Grynol (16:43):

It’s so wild because those are evangelists, these are people … The cool thing is, this group of community investors, they come on our Friday forum pretty consistently. We invite them as special guests. We do this with vendors, and partners, and people, but they come. And we don’t know … Sure you can look at paperwork, but no one knows and no one cares whether it’s a hundred dollars check or a $10,000 check.

Zac Henderson (17:10):

Exactly.

Ben Grynol (17:11):

The identity that has been formed is that I am an investor in Levels, which is an amazing thing, and people say, “Here’s how it’s made a difference in my life.” So just that perspective where somebody feels like they are a part of our journey, and they’re so invested in trying to spread this mission that we’re all on, this education about metabolic health and why it matters, and that you can do something about it. It is just the coolest feeling when you meet these community investors. That was one of the most rewarding things is we bump up the cap, we do all these things, and there was … When people invested, I believe it was during the investment process, add a note, it was something like that. Mechanically, the UI is something like that. Do you want to add a comment? And there were these lengthy paragraphs that said why people invested. And just going through these comments, that had an emotional component, too, where you’re just like, wow, this is impacting people in ways that you can’t really forecast. Those are real stories that are happening.

Zac Henderson (18:20):

Absolutely. I think all of us were reading those comments for the whole next week, and just feeling so humbled and gratified. Because, as you say, in addition to saying go for it Levels, excited to invest, you’re getting snippets of the effect that we’ve had on people’s lives, and the effect that they hope that Levels will have on the lives of their friends, and family, and others. It was hugely emotional.

(18:50):

I remember, I think, Josh Clemente, one of our founders, just talking about how he literally spent hours reading those comments for days after it because they really served to focus in on the mission that we all have here. When you’re at a startup, you’re working hard, you’re doing a lot of work heads down. And if you are able to have a moment where you really hear from a member and it can help focus your direction, it’s a real gift. What we had in those comments and through this crowdfund was that, and just concentrated to a pretty unimaginable degree. I think many of us are, to this day, doing our work with those investors and those comments in mind.

Ben Grynol (19:37):

Yeah, it is such a cool thing to be a part of. We’ve walked into this narrative of how it felt. It was this was really interesting process where we didn’t know what would happen. We’re surprised as far as the performance went, and you’re very much humbled by it because you’re caught off guard where you go, “Wow.” You’re humbled by it, but there’s also a ton of pressure to perform because, oh my gosh, this many people have eyeballs on what we’re doing. It really matters. You’re like, this really, really matters. We went through that narrative.

(20:11):

Let’s go into the post process because it’s easy to, from an optics perspective, external optics, is like, hey, it’s done, ta da, celebrate. But there was … It feels like, from what I observed, it feels like there was more work for you post and all the DD and wrapping up the data room than there was all the work that we put into it to start. It felt like you were always bouncing between what we were trying to do from an institutional perspective and then from the CF perspective.

Zac Henderson (20:44):

Ben, it’s a great point. And the places where the work showed up were a bit surprising. And a lot of this does come down to what we did was a little bit trail blazing. Something you said earlier both resonates and explains this challenge. And that is most companies that do a crowdfunding will do it in place of a traditional fundraise. It’s worth thinking through the reasons why many companies use crowdfunding. Perhaps they’re in a situation where, for whatever reason, they weren’t able to secure the institutional investor funding that they wanted. Maybe the terms weren’t great, maybe they didn’t have the option, what have you. And so, they tend to turn to crowdfunding as a means of sourcing their core investment. And so they do it as a standalone process, and what that means is they only have the one set of regulations to worry about, and that makes the process fairly straightforward.

(21:39):

But by doing the crowdfunding in conjunction with a more standard raise, that actually meant that it was a lot of work for me and our outside counsel to make sure that we dotted all of our I’s and crossed all of our T’s to make sure that the regulations for the two completely different styles of fundraising played nice. So a lot of the work that I was doing in the middle of the raise and somewhat after, had to do with just ensuring that on the back end of things, on the financial side, everything that we needed to do to comply with the rules was done. And so, just to give you a little bit of insight into what some of that process looked like, a standard raise involves what are called accredited investors. These are investors that either have a certain amount of money in the bank or have a certain income level. And depending on what kind of raise you do, you have to verify that they’re accredited in different ways.

(22:35):

Maybe in a simpler context, all you have to do is ask them, “Hey, do you make this much money?” And then they say yes, and you’re good to go. But in more complicated raises you may actually have to get documentation for every single person that invested. And because we did the regulation crowdfunding in the way that we did, we had heightened verification requirements for accreditation, and that was a huge challenge, and basically meant that I had to be paying attention to individual investors throughout the whole process in a way that, if we’d done these processes separately, I probably wouldn’t have had to do. So, it was just a lot of that. That’s what I mean by dotting the I’S and crossing the T’s, lots of work to make sure that all of the details behind the scenes were in place.

Ben Grynol (23:17):

So if you’re doing traditional crowdfunding for a product or service, let’s say through Kickstarter, there’s not the same type of DD process because the DD, the data room is page that says you’re going to buy this widget and it will be delivered on this date, and that’s the end of it. And when you commit to that amount, you get charged for the amount once the campaign comes to a completion. So you invest on day one and it’s 30 day campaign, you get charged on, whatever, day 31, day 30. There’s no confirmation. You’ve already committed. You hit the button and it’s just pending. It’s going to go through.

(23:55):

When you bring it to equity crowdfunding, people are basically raising their hand and they’re saying, “I commit to this thing.” But then there was the process of … And this is the interesting thing about institutional versus crowdfunding, versus having a blended approach. When you’ve got institutional investors, for argument’s sake, let’s say that you might have five to 10, and even 10 typically is a larger pool of institutional when you’re talking about raising a series A, you usually have a lead and a handful.

(24:26):

When you’re talking about equity crowdfunding and there’s … let’s call it 1400, there was a process where … I remember this went on because you were posting threads about it, where it’s like you had to reach out to every person. And we’re doing it with the entire group, but you’re saying, “Please confirm your investment.” And then people were like, “I thought I already committed.” But because of the way equity crowdfunding works, which is the whole point of bringing in the Kickstarter story, is you commit to that Kickstarter campaign, it’s done. That’s your commitment. You can set it and forget it. With this, it was like we had to reengage all the 1400 people to say, “Please raise your hand again, and now hit the button that says, ‘Yes, we can accept the money from you.’” And so, that was added complexity to this whole process, which was mind boggling, but it’s necessary to do.

Zac Henderson (25:17):

Ben, you’re completely right, and this is a great small segue into, if we were to do this again, what are some of the lessons that we learned that might make us adjust our process? Likewise, what are some recommendations that I might make to other heads of finance, and CEOs, and general counsel who might be thinking about doing something like what we did? What we used is a process called testing the waters. And what that allows us to do is first gauge investment before actually filing the paperwork and collecting the final investments. Some of the good reasons to do that are if you’re unsure whether or not you’re going to have a lot of interest, it’s literally a way to test the waters. You can reach out and say, “Hey, we’re considering doing a regulation crowdfunding. We want to see who’s interested.” And then your members, or whoever you reach out to, can reserve their place.

(26:12):

We did this process. And one of the reasons why we did so is we wanted to go ahead and kick it off, but there’s a bunch of additional requirements that we had to do before we could file paperwork. One of those, you talked about a data room and being very transparent, we needed to make sure that we had on file a complete financial audit of the company. This is one of the SEC’s, in my view, very good requirements to make sure that non-accredited investors who use regulation crowdfunding have enough information to safely invest. The problem is that process takes a while. So it took us roughly three months to complete this audit, which we did in between opening up reservations for investment through testing the waters and confirming them.

(26:54):

So if you’re listening to this, it may seem obvious to you that, gosh, having a three month period between saying, “Hi, I want to invest, and then actually sending us your money, there could be some fall off or some confusion there. But that’s ultimately what we dealt with was something like 1400 people who had reserved the reservation, but when it came time to actually close the round, some people were very quick about it and went ahead and pushed the button, so to speak, and they were locked in. But we had a lot of people who we did have to do personal outreach to say, “Hey, you reserved X amount of dollars a few months ago. Would you like to go ahead and confirm? Because if you don’t, we have this wait list of other people who really still want to invest, and we want to give them a chance to.” So it was a process of outreach.

(27:42):

If we could do that process over, I think my recommendation would be not do the testing the waters process, and instead the day that we announce the raise, have everything ready to go so that when people raise their hand and say they want to invest, they can push the button the very same day. I think in retrospect, that would’ve been the more ideal process, especially for a company like ours where we, for the most part, already knew that we had interest. We may not have known exactly how much, but we knew that we had enough interest to make the crowdfunding a good idea.

Ben Grynol (28:15):

The auditing part of it is such a … There’s a dichotomy with it because you’re a startup, you move fast, you you’re going to have janky books. That is par for the course. The irony is that when you need to have this information at your fingertips, it’s like all the stuff that you bypass for so long in the early days of a startup becomes necessary, and it takes that much longer. I think having the awareness, if you want to go through any process, to know that it’s going to take time, and depending on what you’re doing, if your books are like a typical startup where it’s like things are a little all over the map, it’s all there. It’s just harder to find it because it hasn’t been aggregated to a central source. A lot of times Google Sheets is the first place where people are managing spreadsheets, and they’re named … V1 is the name of the sheet. You can’t even find the documents, and you say, “Oh, you got to ask Billy. Billy knows where it is.” There’s tribal knowledge, and it can become pretty hard to unpack.

(29:17):

But knowing that leading into some of these processes, these are things to expect. And that can be difficult, especially if you need the money, if you’re in a position where your burn is pretty high and you’re saying, “We need this money.” It can take a while to actually close. We didn’t close until March, I think it was. Right? So it took a while. Knowing that you’ve got to have some runway of some kind to be able to operate from the time when you kick things off until you’re actually … the check is in hand and you can say we officially have our series A close, it takes time.

Zac Henderson (29:53):

Ben, you’re absolutely right. And I think this goes to some big picture points of good advice for raising money as a startup in the first place. It’s usually a good idea to raise money a little bit before you need it because there is nothing quite as stressful, and nothing that gives away your leverage quite as quickly, as needing the raise to go through this, or next month, or the company is in trouble. So we were in a very good position when we fundraised. We still had plenty of runway at the time. And really, our series A was designed less around just gap filling our books and more around bringing in operators and other people who could be active as investors in the company. But great lesson that even if your outside counsel or whomever says, “Oh, we can do this fundraising in a month, don’t worry about it,” things come up. You will potentially face challenges, and you want to make sure you give yourself enough time to do your full fundraise without it putting existential pressure on the rest of the company.

Ben Grynol (30:58):

So if you’re thinking about some of the lessons, we’ve learned lessons about the process, learned lessons about the value, some of the things are easier to quantify, others are easier to qualify, things like how do you quantify an engaged … somebody who’s really engaged. You can’t really quantify that. You can quantify things like time a lot easier. But if you’re recommending young companies, so companies … Because you could do crowdfunding at different stages. This might be your first raise as far as official capital goes outside of friends and family.

(31:36):

If you’re giving advice to young startups, how would you think about it? Do you like the blended approach? Would you try to raise a smaller round from institutional and then build up this momentum as far as community goes? Would you go the community route? And again, I don’t think there’s a right answer. I think it’s … the worst answer being it depends, are you building a SaaS product? What’s the product? What’s the nature of the engagement of community? But if you are thinking of general principles, where would you point anybody that might be thinking about either doing equity crowdfunding or going for more of an institutional raise?

Zac Henderson (32:13):

Yeah, great question, and I have some pretty core takeaways here. Let’s start with the kind of company that has access to institutional funding. And so, they are considering either doing a crowdfund as a supplement or as a replacement for money that they could already get. I think the best use of crowdfunding, and I don’t mean to be biased because we did something like this, but I do think the best use of crowdfunding is as a supplement to your raise and not as a replacement for it, if at all possible. I also think that I would recommend doing your … and this is different than what we did. If I could go back, this is the change I would make. I would start and close completely our institutional investor fundraise, and then start the crowdfund immediately after, instead of running the processes concurrently.

(33:05):

The trouble is that while you can make the regulations play nice together, they don’t by default, and it creates a lot of extra work for outside counsel, for the company and it really extends your timeline by doing them together. The smart approach, in retrospect, would’ve been for us to run our institutional investor round, and the day after we closed it, start the crowdfunding round on exactly the same terms. That will save everyone involved a lot of headache and make the process go smoother.

Ben Grynol (33:34):

So, a company is doing this, they raise it a certain cap. And for anyone who’s not familiar with cap, that being like 10 million, a hundred million, it doesn’t really matter, your market cap, what you’re raising at, 10 out of a hundred, let’s just call it that, arbitrary. But you’re raising at a hundred million market cap. What you’re saying is that you can close the institutional investor round at whatever cap, and then still, you don’t have to offer the new … Sorry. The terms that you’re raising on with the institutional, you can offer that to the crowdfunding investors. It’s not like the price is going to go up for them. Is that what you’re saying?

Zac Henderson (34:10):

In short, yes, you can. You can adjust the ultimate valuation up by the next amount of money that you raise from your crowdfunded sources. And the ultimate valuation will basically remain the same. In other words, if you have a valuation of a hundred million dollars, and you close that round, then the next day you raise an additional $2 million, well at that point, your valuation probably is about $102 million because you put another $2 million into the company in investment. So in short, that’s something that you would want to discuss with your outside counsel and get specific to your company legal advice. But just in order to make the regulations work well together and not cause your company a lot of headache, doing these things one after the other is the better move. And I would recommend it in that order. I would not start with the crowdfund, I would start with the institutional investor round, and then immediately follow it with the crowdfund.

(35:09):

And, Ben, to answer your broader question, can you close one round, and then do another round, our series A actually comprises three distinct rounds. We discuss them in unity as a series A, but series A is not really the regulatory term. That’s an industry term. When we think about a fundraise, we think of it in terms of what regulation it attaches to. So it’s the standard institutional round, is under what’s called regulation D, section 506B. This is the technical stuff. But most companies will do their standard series A under that particular regulation. We did our series A under that regulation, and then two different ones, one of them being regulation crowdfunding, which is a distinct regulation. So getting a little wonky there.

Ben Grynol (36:00):

And that’s like when you talked about having a broader series A, because you can do what’s called the extension, where you’re extending it to … you’re extending the amount of money that you’re raising at a certain market cap, and that gets to be interesting in itself.

Zac Henderson (36:16):

It does.

Ben Grynol (36:17):

So if you’re thinking of recommending, you’ve got recommendations as far as institutional over crowdfund from a process standpoint, sequentially, that’s the way you would recommend. Are there other learnings or takeaways that you have for young companies when they’re thinking about raising money or are just going through this process? And it’s hard, too. The markets are always changing where sometimes they’re really frothy, and then even now, we’re recording October, 2022, so about a year after we ran this crowdfunding campaign, not even a year. What is it? It’s eight months after we actually closed. And we did the extension after that. And so, it’s ongoing. It really is ongoing. But if you’re thinking about how the markets are always changing, any other takeaways or lessons learned that you have for young founders, young companies, when they’re trying to get traction, like everybody, trying to find product market fit, and you’re always assessing burn versus capital in, and trying to manage it all, trying to decide what to do?

Zac Henderson (37:28):

Yeah. This is a really complicated challenge, no doubt about it. Plenty of very, very smart people grapple with this question and don’t always come to an answer that is a perfect fit for their own companies. What I would say is, I do think, in general, founders tend to be more concerned about dilution than they ought to be. And what that can result in is turning down deals that may ultimately keep the company alive long enough to actually achieve whatever your company’s big bet is. In other words, it really boils down to a bird in the hand is worth two in the bush. Ben, as you say, markets change pretty quickly. You can be in a fantastic fundraising environment today, and a really poor one just a month later.

(38:21):

And so, I think most calculus for fundraising should have at its center, do we have the money that we need to grow our company? That should be the primary concern. Dilution matters. Those questions certainly should still be a part of the equation. But it is possible in this industry to cut off your own nose to spite your face. Some companies are in the very fortunate position of being able to really choose from investors and set their own terms for the most part. But not every company is in that position. And being very realistic about what your fundraising options are, and ensuring that you do whatever you have to do to keep your company going in the direction you want it to go, even if that might mean taking on more dilution than you want, I would say that’s a core component.

(39:12):

Ben, if you don’t mind, just to touch on using crowdfunding in particular, I want to flag one really important thing about crowdfunding, especially if you’re considering using it as your only source of funding. To take a step back, there is a reason why the Securities and Exchange Commission has been pretty careful about opening up crowdfund and why they have this distinction between everyday folks and what are called accredited investors. In companies, we often think about regulators as just difficult because there are so many rules and hoops to jump through. But an agency like the SEC, what they ultimately are tasked with is protecting people.

(39:57):

And it is possible, and you can see this if you search the internet and see what crowdfunds are going on, it is possible for companies to open up crowdfunds, and maybe they really ought not to be taking money from individual investors because their idea isn’t quite baked enough, or maybe if they’re honest with themselves, their trajectory isn’t great. And regulation crowdfunding is quite risky for … Investing in general is risky. And inherently, if as a person your only access to investing in a private company is through crowdfunding, you are taking a risk, and maybe you’re not a financial expert like the venture capital firms are.

(40:37):

So I would just point out that if your company is in a position of relying upon crowdfunding as your sole source of revenue, just be mindful of the ethics of asking everyday folks who are not financial experts for your money. It’s a much different thing when you know your books, and your trajectory, and you have venture capital firms who believe in you, as well, and your crowdfunding investors can look to those entities as a signal that this company has backing, has an idea that really can turn into a great product.

(41:14):

But there’s a lot of room for exploitation in the context of raising money from everyday people who might make 50 or $60,000 and are wanting to give you a thousand of that. So crowdfunding is amazing as an opportunity to help people invest. But there are some ethical questions around using it. And so I would just encourage companies to just be thoughtful about that, and remember that we might be talking about your mom investing in a company, my mom, my dad, someone like that, who maybe doesn’t have the expertise but is excited about a product. So I think we have a responsibility when we use something like crowdfunding.

Ben Grynol (41:50):

And to do you proud as head of council, might as well double down on this. This is not investment advice, this is just our opinion and us sharing our experience. So it’s always good to caveat all of this that it’s really important that when people want to raise money, when people want to ask for money from others, that they’re doing it very much on their own terms, and they’re doing their own homework when it comes to it.

(42:14):

But you said it perfectly, it’s if you’re going to … Whether you are asking for crowdfunding, whether you are asking institutional investors, there is a responsibility to make sure that if you are asking for money, friends and family rounds especially that are way outside the institutional, they’re way outside of this idea of crowdfunding where there is some diligence process, you have to be sure that you have a sound business. We all have to take swings and that is very important. But make sure that when people are thinking about taking a swing with a startup, that you have a sound business model and some idea in place of how you’re going to get from A to B. Startups are inherently hard. A lot of them fail, Any of them can fail at any time. The more money you raise, it doesn’t mean that you become indestructible.

Zac Henderson (43:04):

That’s right.

Ben Grynol (43:05):

It’s actually a lot riskier. You raise more capital, there’s more on the line, and you’ve got a lot of consideration around that. Those are all some of the things that we think about. We’ve got an immense responsibility to our institutional investors and to our crowdfunding investors to show up every day, to perform, to make sure that we’re making an impact with what we’re doing, and to be as honest and transparent as we can with all the information to say, “Here is what we’re seeing, and we want you to see this too, because you’ve given us money and there’s nothing to hide. This is what’s actually happening. It’s very important. If you’re going to fail ever with a company, it shouldn’t be a secret. It should be something that anybody who’s put money into the company has that same visibility. And we feel that responsibility every day with what we’re doing.