For the modern entrepreneur, business crowdfunding has become the name of the game when raising capital. On some sites, all it takes is the click of a few keys and anyone and everyone - even your best friend’s sister’s cousin’s boyfriend’s mom - can fund your brilliant new concept.
Thanks to the Jumpstart Our Business Startups (JOBS) Act that went into effect in May 2016, American entrepreneurs no longer have to wait for credited investors to throw money at them to bring a product or service to market. Going directly to the public for business backing has revolutionized the way startups are funded and built a $34 billion online investment marketplace that officially surpassed venture capital funding last year.
But, business crowdfunding is just the tip of the iceberg when it comes to successfully backing your new project. There’s a lot more you’ll need to support your new venture - and minimize your liability.
You’ve raised the funds. Now what?
Building from the ground up isn’t something you can do alone. Just ask the founders of the Fyre Festival, a botched luxury music festival in the Bahamas that sold tickets for as much as $100,000 each and flopped even before it started, leaving founders liable for fraud.
Without the right support from day one – funding or no funding - your new business venture could disappear as quickly as it materialized. Here’s what you’ll need to turn your best friend’s sister’s cousin’s boyfriend’s mom’s investment into something real.
- A good lawyer. Set your business up right from day one. A good startup attorney will share the tricks of the trade you’ll need to keep in mind when taking all those first steps – like hiring employees. Have your attorney write up all contracts with clients, vendors and investors. Should you be an S-Corp, an LLC or a Partnership? They will know.
- The right employment advice. Consider engaging a Professional Employer Organization (PEO) to handle all employment issues and back-of-the-office stuff. They’ll pay your employees, handle any human resources (HR) issues that arise and administer benefits.
- A banking relationship. When you need to start networking with people in the venture capital world, approach angel investors or get a small business loan from a bank, who will you turn to? Establishing a solid banking relationship from the beginning will help support your business’ growth over time.
- An experienced insurance broker. The right broker will introduce you to the professional liability products you’ll need to prevent the Fyre Festival lesson from happening to you. First, you’ll need a General Liability (GL) policy to protect you and your facility from claims of personal and bodily injury or property damage, and Workers’ Compensation (WC) insurance should one of your employees get injured on the job. [NOTE: WC insurance is required of all businesses with employees operating in 49 states, excluding Texas].
Next, you’ll want to consider Directors and Officers (D&O) insurance to protect you from liabilities resulting from the decisions you make on behalf of the company; Professional Liability (PL), otherwise known as Errors and Omissions (E&O) insurance, to protect you from liability associated with the services or advice you offer clients; Employment Practices Liability (EPL) insurance to protect you from employment-related lawsuits and Cyber Insurance for today’s known and unknown cyber risks. Finally, an experienced broker should offer you risk management services free of charge that help your business institute best practices to avoid lawsuits related to these policies in the first place.
Business crowdfunding has only just begun
The World Bank Report estimates that business crowdfunding will reach $93 billion in global investments by the year 2025. But, not all those that raise money will ultimately take their business to the next level. Contact your HUB broker to see how you can protect yourself and your new project and ensure its success for years to come.