The Developer’s Guide to Crowdfunding, Part 1

Crowdfunding is a relatively simple concept: a bunch of individuals give you small amounts of money so that you can get a project or an idea off the ground. Recently, it’s become a popular way to raise money when building software, particularly for startups.

The Legalities of Crowdfunding

One of the reasons for crowdfunding’s recent popularity is due to the JOBS Act — a piece of legislation that President Obama signed into law earlier this year. The JOBS Act made it legal to use crowdfunding as an investment tool. Prior to the new law, the only option for taking in small amounts of money when raising funds was to essentially accept it as a gift. Sites like Kickstarter and IndieGoGo tweaked the system, letting recipients guarantee funders that they’d get a specific reward for their money. Offering shares in a company just wasn’t an option, though.

Now, however, a company can sell up to $1 million worth of shares in a year, skipping a whole slew of rules set out by the SEC (though the new rules are not yet finalized). The main requirement is that an investor can’t commit more than $2,000 in many cases. You’ll still need a financial professional to walk you through offering stock to these crowdfunders, but it’s a much simpler proposition than it was a year ago. Several new websites are popping up to handle organizing these sorts of investment drives, along the lines of what Kickstarter has done, but most are still only in the initial stages of launching.

Avoiding the Stock Issue

Of course, you can stick to working through some of the more established sites. Kickstarter, in particular, has a proven track record in manding funding campaigns for both software and hardware projects:

• Diaspora, a project to create an open source personal web server, received $200,642 (after setting a goal of $10,000).
• Trigger Happy, a mobile app that serves as a camera remote, plus the hardware necessary connect it to a camera, received $221,740 (after setting a goal of $25,000).
• Hypothes.is, a project to annotate online media and create a network that will let readers quickly judge the validity of information, received $105,787 plus a matching goal offsite that effectively doubled the money raised through Kickstarter (after setting a goal of $100,000).

There are plenty of projects that don’t get funded, or don’t raise such dramatic amounts of money, both on Kickstarter and through other sites. But, if you’re prepared to invest plenty of time in promoting your crowdfunding campaign and you’ve got a little marketing know-how, it’s very possible to raise what you need to build your next project.

Catch Part 2 tomorrow.