In my work with startups, raising investment is one of the biggest challenges faced by entrepreneurs. Not only are securities laws complicated, but many entrepreneurs struggle to find investors. When negotiating with investors, limited funding options can result in unfavorable terms. This articles goes in to detail on how you can accept investment from any Washington state resident and set the terms of the investment.

Washington’s updated intrastate equity crowdfunding law offers an alternative to traditional investment, and may be the best fundraising option for Washington entrepreneurs. The law no longer prevents interstate commerce, and allows companies to raise up to $1,000,000 from Washington state residents; including the non-accredited investors who make up the majority of Washington’s population.

Each non-accredited investor can invest $2,000 or more depending on their income level. Simple back-of-the-napkin calculations show a company could raise $1,000,000 from five-hundred $2,000 investors, from two-thousand $500 investors, or from any other mix of small and large investors.

Before launching a campaign, companies are required to file for approval with the Washington Department of Financial Institutions. This filing includes a $600 fee and substantial legal disclosures. To date, these costs and the limitations of the original law have been a barrier for many companies. However, I recently submitted a letter to the Department of Financial Institutions requesting an advisory opinion on my proposed two-stage crowdfunding process. This advisory opinion will clarify the legal requirements to pre-launch an equity crowdfunding campaign using rewards crowdfunding. Below is an outline of the proposed process.

Stage One – Rewards Crowdfunding

Stage one of my proposed process utilizes tradition rewards-based crowdfunding to test the market and determine whether the company can attract sufficient interest to justify launching an equity crowdfunding campaign.

Like a traditional rewards crowdfunding campaign, the stage one crowdfunding listing offers rewards for supporting the company. However, the amount raised is less important than the number of Washington based contributors because each contributor will be notified via email if/when the company begins accepting equity crowdfunding investment. Accordingly, the rewards may be offered at or below cost to help promote the campaign. Though the campaign funding may offset the cost of launching an equity crowdfunding campaign.

It should be noted that this stage will require a marketing campaign. It’s a common misconception that crowdfunding platforms have tons of users ready to contribute. But one crowdfunding marketing professional claimed as much as 80% of successful campaign contributions come from marketing outside the crowdfunding platform.

In the case of intrastate equity crowdfunding, marketing will be even more critical because the company must target Washington state residents. Washington intrastate equity crowdfunding only allows investment from Washington state residents, and the long-term goal is converting these contributors to investors. (Note: federal equity crowdfunding is an option, but it is more expensive and outside the scope of this article). Accordingly, companies need to get creative and consider hiring a marketing specialist.

As a starting point, check out Indiegogo’s and Kickstarter’s guides to launching a rewards-based crowdfunding campaign. More importantly, before launching a campaign, speak to an attorney specialized in Washington intrastate equity crowdfunding. The specific language used in the campaign and disclosures are important to ensure legal compliance.

Stage Two – Equity Crowdfunding

Some companies have existing marketing channels that can help promote an equity crowdfunding campaign. If this is the case, I might advise skipping the reward crowdfunding stage and jumping right into another creative solution to promote an equity crowdfunding offering. But the importance of stage one is to ensure the company has a pool of potential investors and a plan to convince them to invest.

An essential part of convincing investment will be offering an attractive capital structure designed for the needs of the particular business. The simplest option is offering common stock. Common stock essentially makes investors proportionate partners in the company. Investors won’t receive liquidation preferences or other rights commonly negotiated by accredited investors. But, they will receive voting rights. For a pre-revenue company, looking to raise a small amount of money, this is the easiest and cheapest option to launch a campaign.

More detailed capital structures offer unique benefits to companies at different stages of development. For example, an established company with the revenue to pay dividends might offer preferred stock with defined dividends and rights for the company to repurchase the stock in the future. This structure allows companies to raise the capital they need, but preserving founder’s long-term equity.

Alternatively, higher risk startups without the revenue to support dividends could offer convertible preferred stock. This preferred stock might have limited voting rights and dividends but could offer a conversion premium allowing the investor to convert preferred stock into multiple shares of common stock down the line (often 1.2x). Depending on the arrangement, these structures can make the proposed stock more marketable to investors, helping the company raise the funding they need.

These are complicated legal agreements and I always discuss clients goals before determining a structure. But, one benefit to equity crowdfunding is that the company sets the terms. Those terms need to be marketable. And there are restrictions on overly complicated agreements. But there are lots of options to structure a deal that works for diverse companies.

This post has highlighted one proposed method to kickstart a Washington intrastate equity crowdfunding campaign. This is by no means the only option. You may have your own creative idea for launching an equity crowdfunding campaign. If so, I advise discussing the plan with counsel to ensure you don’t violate securities laws. However, if you are a Washington based entrepreneur looking to raise investment, you should consider Washington intrastate equity crowdfunding.