What is Wefunder and how does it work?
Wefunder is a platform that enables individuals to invest in startups and small businesses. It operates by connecting investors with founders who are seeking funding to grow their companies.
The process typically involves the founders presenting their business proposals on the Wefunder platform, outlining their business models, goals, and the amount of funding they are seeking.
Investors can then browse through these proposals and choose to invest in the companies that align with their interests.
The investment process on Wefunder is regulated and designed to be accessible to both accredited and non-accredited investors, allowing a broader range of individuals to participate in startup investing.
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How risky is Wefunder?
4/5— High Risk
Investing in startups through Wefunder carries a high level of risk, and it's crucial for investors to be aware that they could lose their entire investment. The inherent risk of startup investing is significantly higher than that associated with investing in public companies on the stock market. Therefore, potential investors are advised to only invest funds that they can afford to lose without it affecting their lifestyle or retirement plans.
Additionally, Wefunder's operations are governed by a complex and rapidly changing regulatory environment. Changes in regulations, or shifts in regulators' interpretations of existing laws, could negatively impact Wefunder's business model. There's also the risk that regulatory bodies may view Wefunder's current or future activities unfavorably. These regulatory uncertainties add another layer of risk to investing through the platform.
How liquid is Wefunder?
1/5— Minimum Liquidity
Liquidity on Wefunder is limited, as there is no public market for the investments made on the platform. This means that selling your investment before a company goes public or is acquired can be challenging. However, it is not impossible. During the first year after your investment, you are allowed to sell your stake to a family member or an accredited investor. After the first year, the restrictions ease, and you can sell your stake to any interested buyer, regardless of their accreditation status or relationship to you.
The process of selling your investment requires you to take proactive steps. Firstly, you must find a buyer for your stake. This task is solely the responsibility of the investor looking to sell. Once a buyer is found, the next step involves contacting Wefunder at their support email to initiate the legal transfer documents necessary for the transaction. It is important to note that Wefunder does not facilitate the transfer of funds between the seller and buyer; this aspect of the transaction must be arranged independently by the involved parties.
How volatile is Wefunder?
3/5— Moderate Volatility
The assets available for investment on Wefunder, primarily early-stage startups and small businesses, are inherently volatile. This volatility stems from the unpredictable nature of startup success, market dynamics, and the broader economic environment.
Startups often face high failure rates, and their financial performance can fluctaneously significantly as they navigate product development, market entry, scaling, and potential regulatory challenges.
Unlike more established companies with predictable revenue streams and market positions, the value of investments in startups can change drastically and rapidly, reflecting the high-risk, high-reward nature of early-stage investing. This volatility means that while investors have the potential for substantial returns, they also face the risk of significant losses.
What is the average rate of return for Wefunder?
N/P— Not Predictable Return
Investors on Wefunder can earn returns through various types of investment contracts, each with its own mechanism for generating income:
1. Debt: This includes simple loans with a fixed repayment schedule or revenue shares that return a fixed amount (e.g., 2X the investment) but depend on the business's revenue performance. In revenue shares, the faster the company grows, the quicker the return is earned, potentially leading to a higher effective interest rate.
2. Convertibles: Common in early-stage technology startups, convertible notes or Simple Agreements for Future Equity (SAFEs) convert the investment into stock at a later date, typically during a priced round of financing. Returns are realized if the value of this stock increases over time and the shares are sold.
3. Stock, No Dividends: Investors buy equity at a fixed price per share, similar to purchasing stock in the stock market. Returns are earned if the company's value increases and the stock's value appreciates, leading to profit upon sale, especially if the company is acquired or goes public.
4. Stock, Dividends: While rare for tech startups, some later-stage local businesses, like a brewery planning to open another location, might offer dividends. These can be a fixed dividend per share per year, a percentage of profits, or a profit-sharing model that changes after the initial investment is repaid.
Each class of investment on Wefunder has distinct terms and potential returns, with the possibility of dividends being specific to later-stage investments in local businesses rather than early-stage tech startups.
What is the minimum investment amount for Wefunder?
The minimum investment amount on Wefunder varies depending on the specific offering and the investor's accreditation status.
For most Community Rounds on the platform, the standard minimum investment is set at $100.
Whether an individual is considered an accredited investor plays a critical role in determining their investment capacity on Wefunder. Accredited investors, as defined by regulatory standards, are not subject to any investment limits when participating in campaigns governed by Regulation Crowdfunding (Reg CF).
For those who do not meet the criteria of an accredited investor, the amount they can invest in Reg CF offerings may be subject to certain limitations based on the specific terms of each offering and regulatory guidelines.
What is the investment time horizon for Wefunder?
Investments made on Wefunder typically have a long-term time horizon, with the average return period, if a return is realized, being around 7 years.
This extended timeframe is especially common for investments structured as convertible notes or SAFEs (Simple Agreement for Future Equity), where the return on investment is contingent upon a significant company milestone such as going public or being acquired. Consequently, investors should be prepared for the possibility that it may take several years before they see any return on their investment.
Who can invest in Wefunder?
Individuals aged 18 and older are eligible to invest on Wefunder, with the platform open to both accredited and non-accredited investors. However, specific eligibility requirements for investing in each Community Round may be set by the issuers themselves, so potential investors should consult the relevant Community Round page for detailed information.
Investment limits are in place, influenced by an investor's income, net worth, and any prior investments in Title III/Regulation CF offerings. While many opportunities on Wefunder are available under Regulation CF, allowing a broad investor base, some investments may be restricted to accredited investors only.
Geographically, residents of the Canadian provinces of Alberta, British Columbia, Ontario, and Quebec are excluded from investing through Wefunder. Additionally, investments from individuals in certain sanctioned countries, including Cuba, Iran, North Korea, Russia, Syria, and specific regions of Ukraine, are not accepted.
Wefunder also accommodates investments made through entities. Investors can link an entity to their Wefunder account and choose to invest through it by adjusting settings in their account. This option allows for both individual and entity investments in the same Community Round, providing flexibility for how investments are made and managed.
Is Wefunder regulated or audited?
Wefunder operates within a tightly regulated environment, primarily under Regulation Crowdfunding (Reg CF) in the United States. This regulation allows the general public to invest in startups and small businesses through crowdfunding platforms, which must be registered with and regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Regulation Crowdfunding sets specific rules for how much money an individual can invest, how much a company can raise, and mandates certain disclosures by the companies seeking funding to protect investors. For instance, companies raising funds through Reg CF are required to provide financial statements, which may need to be reviewed or audited depending on the amount of money they are raising.
As a platform, Wefunder must comply with these regulatory standards, including conducting due diligence on the companies it lists for funding to ensure they meet SEC and FINRA requirements. Additionally, Wefunder itself undergoes regular audits and inspections by regulatory bodies to ensure compliance with the laws governing securities and crowdfunding. These regulatory frameworks and oversight mechanisms are in place to create a more transparent and secure environment for investors participating in crowdfunding activities.
Is Wefunder insured?
Wefunder does not explicitly mention offering insurance for investments made through its platform. In the realm of investing in startups and small businesses via platforms like Wefunder, the concept of insurance differs significantly from traditional insurance policies that cover physical assets or provide liability protection.
Investors are generally exposed to the full risk of their investment potentially losing value without a safety net. The emphasis is on the high-risk nature of these investments, with individuals encouraged to invest only what they can afford to lose, acknowledging the absence of an insurance mechanism to safeguard their capital.
Does Wefunder distribute payouts?
No Recurring Payouts
Wefunder itself does not directly offer dividends on investments, as most investments on the platform are in early-stage startups and small businesses, which typically reinvest any earnings back into the company to fuel growth.
The nature of investments on Wefunder, such as equity, convertible notes, or SAFEs (Simple Agreement for Future Equity), usually does not entail periodic dividend payouts. Instead, the primary return on investment for these types of financial instruments comes from capital gains realized through an exit event, such as the company being acquired or going public. In such scenarios, the investor may see a return if the value of the company has increased since their investment.
What are the annual fees for Wefunder?
Wefunder imposes fees on investors at different stages, mainly during the transaction process.
When investors make payments through bank ACH, wires, or checks, they incur a one-time transaction fee of 2%, subject to a minimum of $8 and a maximum of $100. For those opting to use credit cards, Apple Pay, or Google Pay, the fee is higher at 5.5%, with the same minimum but no maximum cap. These fees are one-time charges and do not recur.
For investments structured as a WeFund, Wefunder does not collect management fees or earn transaction-based revenue. Instead, there is a small administrative fee applied to cover the lifetime operational costs of the WeFund, including regulatory filings, accounting, and K1 distribution. This fee is contained within the WeFund, ensuring it operates to maturity without requiring additional contributions from investors for these purposes.
How do I handle my investments in Wefunder?
Investors on Wefunder can manage and oversee their investments through the investor dashboard, accessible via the Wefunder Portfolio. This dashboard provides a comprehensive view of the investor's current reservations and investments, including details on the status of each investment and relevant payment information.
If a Community Round is still active, investors have the ability to edit their investment. Additionally, the dashboard allows for the downloading of contracts related to each investment, ensuring investors have access to all necessary documentation. This centralized portfolio management tool enables investors to keep track of their investments and make informed decisions.
How does Wefunder get taxed?
Wefunder provides tax reporting support to investors based on the type of investment they have made:
1. Schedule K-1: Investors who have invested through an LLC, either directly or via a Special Purpose Vehicle (SPV) used in a Community Round, will receive a Schedule K-1 for tax years in which the LLC reports a taxable gain or loss. This form is critical for investors to report their share of the LLC's income, deductions, credits, etc.
2. Form 1099: Investors who receive payments from a company, such as quarterly payments on a revenue share contract, may receive a Form 1099, which reports the income received from these investments.
For SPV Community Rounds, Wefunder coordinates with accounting partners to generate and distribute Schedule K-1s as necessary. For Community Rounds not utilizing an SPV, it's the responsibility of the company in which the investment was made to generate the necessary tax forms, although Wefunder may assist in their distribution. Similarly, for loans and revenue share investments, the issuing company is responsible for generating and sending Form 1099s, with Wefunder potentially aiding in distribution.
Investors can access and review their investment contracts, which provide details on the type of investment and the associated tax documentation, directly from their portfolio page on Wefunder.
How many investors are on Wefunder?
Wefunder has attracted over 1 million investors to its platform.
The median investment amount on the platform is $250. To date, 3,261 founders have funded their ventures through Wefunder, securing a total of $697 million in capital.
Who is the CEO of Wefunder?
Nick Tommarello serves as the Founder and CEO of Wefunder. He brings a diverse background to the role, combining skills in design and engineering with business acumen from an MBA, and he is also a holder of Series 65. Tommarello has been a part of renowned startup accelerators, Y Combinator and Techstars, which underscores his deep involvement in the startup ecosystem.
Greg Belote is another key figure at Wefunder, holding the position of Founder and CTO. He has an advanced educational background with a Master's degree from MIT. Similar to Tommarello, Belote is an alumnus of Y Combinator and Techstars, indicating a strong foundation in technology and startup development.