What is equity crowdfunding?
Equity crowdfunding connects a business seeking capital with multiple investors who may acquire an ownership interest under the terms of an offering. The investment can be direct or through a legal structure such as an SPV, depending on what is permitted and how the offer is arranged.
It is different from donating, pre-ordering a product or lending money. Investors take business and ownership risk. A successful company may become more valuable, but success is uncertain and an investment can be lost in full.
What does owning equity actually mean?
It means holding a defined ownership interest, not simply having an account on a website. The share class, company documents and investment agreement determine economic and other rights. A digital statement can help record a position; it is not a substitute for the legal arrangements that establish it.
Not all crowdfunding is the same.
| Model | What the supporter provides | What they may receive |
|---|---|---|
| Donation | A contribution to a cause. | No financial ownership or repayment right in exchange. |
| Reward / pre-order | A payment supporting a product or project. | A promised product, service or non-financial reward, subject to delivery risk. |
| Lending-based | A loan under agreed terms. | Contractual repayment rights; default and other risks remain. |
| Equity-based | Capital invested in a business or defined ownership structure. | An ownership interest and specified rights, with uncertain returns and possible total loss. |
Valuation is a price, not a promise.
A pre-money valuation describes the agreed value of a company before a new equity investment. A post-money valuation adds the new capital raised, under the simple assumptions below. The ownership percentage depends on the investment price and the total shares or interests after the round.
A valuation does not guarantee future performance, determine a share's resale value or mean that a buyer will be available. Different share classes, convertible instruments, option pools and fees can make the actual calculation more complicated.
See how ownership could be calculated.
Illustrative ownership = your investment ÷ (pre-money valuation + total new equity raised). Assumes the full round closes at one price, your investment is included in the round, and there are no fees, options, convertible instruments or other dilution. It does not estimate investment returns.
What is dilution?
When a business issues more shares, an existing investor's percentage ownership can fall unless they participate or other arrangements apply. For example, 100 shares out of 1,000 represents 10%. If the company later issues another 1,000 shares and that investor buys none, 100 out of 2,000 represents 5%. A lower percentage does not, by itself, tell you whether the investment's value has risen or fallen.
Your rights depend on the documents.
Do not assume that all shareholders have the same voting, dividend, information, transfer or exit rights. Understand the share class, any preference rights held by other investors, and how decisions are made. Ask how the investment could be affected by later funding, a sale, financial difficulty or changes to the platform.
Direct ownership or an SPV?
With direct ownership, an investor may be a shareholder in the operating company. An SPV is a separate entity created for a specific purpose; it may hold the operating-company investment while participants hold interests in the SPV. The legal and economic consequences can differ. Review who controls the SPV, who administers it, how fees are paid, how votes are exercised and how money reaches participants.
What does escrow do?
Where available and properly structured, escrow can hold funds while specified completion conditions are checked. It does not protect investors from a business failing after funds are released, guarantee returns or replace due diligence. Any future arrangement must identify the provider, release conditions and treatment of unsuccessful campaigns.
Returns are possible. They are not promised.
Potential routes include dividends if declared and legally payable, or a sale of shares in a permitted transaction. An acquisition, buyback or public listing may create an exit opportunity, but each is uncertain. Many private investments have no ready market and may need to be held for a long time, potentially indefinitely.
A business can grow without paying dividends. It can raise another round at a different valuation without giving you any way to sell. It can also fail completely. Never treat equity as a savings deposit or assume a fixed income, a short-term return or a refund on demand.
The plain-language glossary
- Equity
- An ownership interest in a business or legal investment structure.
- Cap table
- A record summarising who owns a company and the relevant holdings or interests.
- Valuation
- An agreed or estimated company value used in a transaction; not a guarantee of worth or future results.
- SPV
- A special-purpose vehicle: a separate legal entity created for a defined purpose.
- Dilution
- A reduction in percentage ownership, commonly after new shares or interests are issued.
- Due diligence
- Reviewing a business, its documents and its risks before making a decision.
- Liquidity
- How readily an asset can be sold for cash. Private shares often have limited or no liquidity.
- Dividend
- A distribution to eligible shareholders when lawfully declared; it is not automatic.
- Pre-emption
- A possible right to participate in certain new issues or transfers, depending on the governing documents.
- Exit
- A possible route to dispose of an investment, such as a permitted share sale; not a guaranteed event.
Further reading: Crowdcube: first-time investor guide (general concepts; its jurisdiction-specific rules do not apply automatically in Jordan). For Jordanian securities information, consult the Jordan Securities Commission. This guide is general education, not financial, legal or tax advice and not an offer of securities.