So you've raised money from your crowdfunding campaign, and a question pops into your head: What if you just took it? You could alternatively be a backer who has just seen a project you donated to get fully funded. What if the creator just takes your money and leaves?
Do you have to pay back crowdfunding? The answer is: Yes, for the most part. There are situations where creators do not have to pay backers or donors back. However, a campaign is a binding contract between the two parties so it's not as if the money is free. Laws exist to protect backers.
As you can see, the situation is a bit murky but it's not as if this is terribly complicated. Understanding a few key points is crucial to figure out all of this. Read on to understand how it all works.
To Return or Not?
The first thing both backers and creators should be aware of is that backers are not charged for their contribution amounts unless the campaign is successful. The only exception to this is a donation based campaign where money goes towards a good cause.
In such cases, backers obviously do not demand any results or performance updates per se and thus, there is no need for campaign creators to worry about returning money.
There are deep moral considerations to this of course. No one wants to be the kind of person who raises money to build a school and then disappears.
Donation based crowdfunding platforms tend to operate on good faith and unfortunately don't have ways to track how the money being raised is used. For example, the nonprofit fundraising platform Fundly doesn't explicitly address the question of fraud and instead relies on backers to report suspicious campaigns.
Equity Based Campaigns
While donation based crowdfunding is a bit murky with its policies, there is no such confusion when it comes to equity based crowdfunding. This used to be the domain of accredited investors but these days, anyone can invest in exchange for equity.
As such, this is a business transaction and it involves a lot of risk. You're receiving a stake in a startup that might have a great business idea but there are no guarantees that they'll be able to execute it.
After all, many startups go bust.
The odds of finding the next Facebook or of even getting your money back is low. The positive side of these platforms is that you'll be investing alongside venture capitalists and angel investors so you'll be receiving the same terms as them.
If the business does fail, you won't be getting your money back. In fact, there's just no expectation of it to begin with.
You'll sign a shareholder agreement with the company you've funded and this agreement will clearly state that you're willing to undertake the risk of loss and won't hold the company liable for the amount you donated.
Of course, if the management acts in a manner that is detrimental to shareholders' interest, you could go after them in court. However, this costs money and you'll probably be suing someone who doesn't have any so it's unlikely you'll get your money back.
From a creator's perspective, you will be expected to answer your investors' questions about how you're using their money and about the prospects of your company.
As long as you act in good faith, you're not obligated to return shareholders' money.
Having said that, it is in your best business interest to conduct business successfully and provide shareholders with gains. This is just common business sense really.
If your business fails or if your product was not as successful as you anticipated, then you might have to negotiate terms with your investors about what to do with the remaining cash. Some investors will want their money back while others might want you to try something else.
There's no standard playbook here and it depends on the situation according to the the business environment. The bottom line is: Do your best to make your business a success. If you run out of money, be prepared to prove you acted in good faith.
If you don't do this, you could be in a world of trouble.
Rewards Based Campaigns
Rewards based crowdfunding is where the question of returning backers' money has the greatest clarity. This area of crowdfunding was the first to get its act together with respect to protecting the rights of backers.
In the earlier days of crowdfunding, there were a large number of campaigns that were blatantly fraudulent and effectively stole backers' money.
Around 2013, Kickstarter was one of the first platforms that realized this was becoming a massive problem and moved swiftly to put policies in place that made the entire process a lot more clear.
Briefly, here's how it works: During the fundraising phase, the entire process is a tripartite agreement between the platform, backer and creator. The platform merely functions as a facilitator that allows the backer to place money in the creator's ideas.
Once the funding goal is hit, the platform backs out of the picture. From now on, it's a dual agreement between the creator and backer.
As a campaign creator, you need to be extremely careful with what you promise your backers in your pitch. You need to clearly state all information about timelines, your credentials as well as the risks associated with the project. Stating that backers might lose their money in the venture is a good practice.
Many creators don't do this and instead aim to create the most positive picture imaginable since this is what works for marketing.
However, this is looking at only the short term picture and ignores the long term effects. You might be opening yourself up to be sued in court by doing this.
It's best to hire the services of a professional who knows who to craft pitches that will both effectively market your product as well as keep you legally covered.
The reason you want to do this is because you want to make sure you can demonstrate that you acted in good faith throughout the process.
If a judge declares that you did act in good faith then you're not required to return backers' money. From a backer's perspective, it's important to document all of your interactions with the creator and to make sure you demonstrate that they had no intention of delivering their product.
Some backers give money to projects without taking into account the fact that crowdfunding is a risky business and you're not guaranteed returns of any kind.
It's best to contribute money that you can afford to lose and not harbor unrealistic hopes with these kinds of contributions. That way, you won't have to worry about having to fight someone in court to get your money back.
What Platforms Say
So what do crowdfunding platforms say about all of this exactly? Well, the question of 'do you have to return money back' is a tough one to answer because so much depends on whether creators acted in good faith or not.
Rewards based crowdfunding is where this question often comes up so it's worth looking at what Kickstarter has to say about all this. The platform clearly states that creators need to adhere to certain standards of accountability:
Therefore, creators need to be really careful about the language they use in their campaigns. While most backers will not take the trouble to sue creators in court, all it takes is one person to sue you and you'll likely land in a world of trouble.
While you don't have to always return backers' money, you do need to keep the bigger picture in mind. Crowdfunding risks extend far beyond the money you raise. It all comes down to proving you acted in good faith and to do this, you need to carefully evaluate the ways in which you communicate with your backers.
Remember to always keep the big picture in mind and don't sacrifice this for short term marketing goals. This is how you'll prevent yourself from getting sued!