Equity Incentive Model of Crowdfunding in Different Types of Projects

Transcription

1 Equity Incentive Model of in Different Tyes of Proects Lingling Huang, Li Xin School of Economics and Management, orth China University of Technology, Beiing,China Abstract As a new financing tool for start-us on the Internet, crowdfunding based on equity incentive model is beginning to take shae in Euroe and the United States. And it is increasingly aarent that equity crowdfunding has effects on the active economy and roserity market. The aer investigates an equity incentive model of crowdfunding in creative and high-tech roects. It is shown that investors in creative roects focus on consumer reference and the quality of roducts, while investors in high-tech roects ay more attention to the value of roects and investment references. The rime investors care focus on the share stakes from financiers. The amount of funds that each investor contributes and the total number of investors are critical for financiers, however, the investment in latforms is also imortant to high-tech roects. In latforms, they try their best to romt the transactions between financiers and investors and rovide them with other services to realize rofit. Incentive mechanism exists among articiants but a good atmoshere for equity incentive model of crowdfunding is needed. Keywords - Equity incentive model;crowdfunding;financing channel;different tyes of roects;utility I. ITRODUCTIO Equity-based is originated in the United States, unlike non-equity-based crowdfunding, it is a longerterm investment behavior with higher risks. It means financiers resent the details about financing roects on crowdfunding latforms, such as introductions, financing needs, transfer shares and so on. Then investors subscribed shares to suort the develoment of entrereneurial roects, and investors get a stake in return[]. And this financing channel is common for start-us or the start of the small and medium-sized enterrises, esecially in the software, network, comuter and communication, media and other enterrises[2]. As an innovative financing mode, equity-based crowdfunding reduces the cost of financing, imrove the efficiency of the financing, however, there are many uncertainties due to the lack of overall system, and the equity-based crowdfunding is still in the stage of germination test. Fortunately, financial markets are in a stage of vigorous develoment in our country, relevant legislations are about to imlement, thus the equity-based crowdfunding will have great develoment in the future. According to the crowdfunding reort from the world bank, China will be the largest market of all over the world with a suer size over 50 billion dollars[]. In this aer, we re going to discuss the oeration model and incentive rincile of equity-based crowdfunding in section two. Section three and section four are main arts of the article, we discuss equity incentive model in creative roects and high-tech roects from crowdfunding investors, caital seeking ventures and crowdfunding latforms resectively. Section five is conclusion. II. THE OPERATIO MODEL AD ICETIVE PRICIPLE OF EQUITY-BASED CROWDFUDIG A. The Oeration Model of Equity-Based There are at least three articiants in the oeration model of equity-based crowdfunding: caital seeking ventures, crowdfunding investors, crowdfunding latforms, sometimes there may be escrow institutions as well. In Fig., the oeration model has illustrated. Caital seeking ventures Escrow institution 7 Figure. The oeration model of equity-based crowdfunding. Peole who has rich investment exerience and strong ability of bear risks usually designated by crowdfunding latforms to act as investment leaders and coordinators, and other investors followed. Both kind of investors are comany s shareholders, but leaders articiate in the management 5 latforms 2 9 investors submit roect lanning or a business lan, set u the amount of funds needed, shareholding roortions and deadline 2 make verification of the investors qualification and transfer information about the roects after some examinations romise or actual delivery a certain number of funding to roects which they like 4 check out the roects about integrity, authenticity, and rovide other services 5 transfer financing funds to escrow institutions 6 articiate in the growth of the enterrise 7 distribution of returns 8 ay funds to financiers artially 9 inform investors before ay funds to financiers DOI 0.50/IJSSST.a ISS: x online, rint

2 while followers have voting rights of maor matters but not to articiate in the general affairs management. This model is common in our country, for examle, Angelcrunch, Daiatou, and so on. B. The Incentive Princile of Equity-based Public investors are those eole who have registered on crowdfunding latforms, they need to be aroved by the qualification of the latforms before investment. They suort the roects within the rescribed limit of investment and obtain corresonding shares, enoy the rights of ordinary shareholders even affect decisions of entrereneurs. Sometimes investors rovide funds on urose of witness successful entrereneurshi. Investors ursue utility during the rocess of consume, exerience roducts or oin in investment[4]. Caital seeking ventures are generally small micro enterrises who lack of funds to ut their originalities into ractice. Usually the roects are resented with high and new technology, innovative business model and features like high market growth. At the same time, the roect financiers must set u the comany, following the modern cororate governance system, and they begin to financing after examined by latforms. As enterrises, financiers roduce or sell roducts, these situations involving benefit interests, so their ultimate goal is to maximize rofits. latforms are Internet terminals, they are reviewers, suervisors to financiers, and rovide both financiers and investors with technical consulting and other services. They act as enterrises so they strive for more transactions as much as ossible in order to maximize rofits. The obectives of three articiants in equity-based crowdfunding can be listed in Fig. 2. Caital seeking ventures rofit latforms rofit investors utility Figure 2. The obectives of three articiants in equity-based crowdfunding. III. EQUITY ICETIVE MODEL I CREATIVE PROJECTS According to statistics from ChuangTou website, there are 20 industries in all, such as entertainments, electronic roducts, IT services and so on. Although the classification of start-u industries is numerous, most of roects in equitybased crowdfunding are technology, media, high-tech and creative roects in our country. So we divided crowdfunding roects into two arts based on different tyes, and one of them is creative roects, the other is high-tech roects. And in this section, we are going to discuss incentive mechanism in equity-based crowdfunding on creative roects, investors, financiers and latforms are considered searately. A. Incentives of Investors Motivations of investors are heterogeneous, investors engage in crowdfunding for distinct incentives, for examle, access to investment, early access to new roduct, community articiation, suort for a roduct, service, or idea, etc[5]. Investors can choose roects which has otential market and in line with the future develoment, and become original shareholders by articiate in equity-based crowdfunding. Comared to traditional financing ways, scattered small stakeholders can also undertake choosing roects they referred according to their own udgment. As for investors on creative roects, they ay attention to the originality of the roects, and they become shareholders through ay a certain number of funds, and they may articiate in the rocess of designing or making roducts. Here we consider two kinds of situations. Case Investors only enoy equity stakes as a return of investment. Investors are individuals who ooled their money to suort the roects of their aroval with the aid of network latform, and they only accet an equity stake as a return of their investment, so investors utility ( U i )can be described as follows: U i G0 Q - P E ormal( a, b) r () G --- the basic value which can be obtained from the 0 roduct; --- the reference of consumers; Q --- the quality of roducts; P --- the rice of the roduct; E --- the equity stake that investors gained from the financiers; r --- the losses under the risk of uncertainty of the roects and anything else. ormal( a, b) means factors which also may have an imact on investors utility, for examle, there may be gains or losses from other activities which consumers ut their funds into, access to other investments through equitybased crowdfunding, and so on. Actually, they are not secific and can t be quantified. We assume that the function is normal distribution, and take it into account. Case 2 Investors enoy equity stakes as a return of investment, articiate in the rocess of designing or making roects and enoy other returns as well. So the utility of investors can be described as follows: U i 2 G0 Q P E ormalc (, d) r2 (2) ---the other social utilities that investors obtained from articiating in the rocess of designing or making roducts. Here we take a movie equity-based crowdfunding roect as examle. Investors who ool more funds may have the oortunity to take hotos with main characters or get the signatures. Actually it can be afforded for most of DOI 0.50/IJSSST.a ISS: x online, rint

3 individuals comare to concerts or greetings. So there may be a large utility for investors to behave like this. From what have discussed above, the incentives of equity-based crowdfunding investors are related to consumer reference, the quality of roducts and the share stakes from financiers. Other social utilities also have an effect on investors utilities. Anyway, we shouldn t ignore the risks that investors take when they articiate in equity-based crowdfunding. B. Incentives of Caital Seeking Ventures has been used by financiers to demonstrate demand for a roosed roduct, which can lead to funding from more traditional sources[6]. Comanies make use of the crowd mainly for cost-reduction reasons[7], and they resent the roects on crowdfunding latforms in order to seeking funds to realize their goals. Comared to bank loans or other traditional financing ways, crowdfunding is more convenient. Taking art in based-equity crowdfunding allows the caital seeking ventures to reduce the length of new roduct develoment as well as its costs, have a better customer accetance, and increase the customers ercetion of roduct newness. What is more imortant, caital seeking ventures need the funds to imlement the roects, and they can imrove the roects gradually because investors are articiate in equity-based crowdfunding. Assume that the formula for total utility( U f )of financiers by equity-based crowdfunding is: Uf Fm n C P Va b C ormal ( e, f) r () F m n --- the funds that financiers obtained; Fm --- the rice that investors aid on a certain way of return; n --- the amount of investors who invest in this way;it means: F F F F m n 2 2 (4) C --- the cost of the roducts which the financiers incline to imlement through equity-based crowdfunding; --- the ercentage of the rofits that financiers will distribute to investors, usually 0 <; Va --- the value of information obtained from each investor; b --- the amount of investors; C --- the amount of fees which ays to crowdfunding latforms, usually 5% or more of total financing amount of roects; --- the utility which increases due to the choice of investors in equity-based crowdfunding; r --- the risks of being coied or anything else which needed to bear after roects have been resented on latforms. ormal ( e, f ) means all of the social utilities financiers gained by resenting roduces on latforms. For examle, resenting the roects on crowdfunding latforms may lay a roaganda role in crowdfunding, thus there would be more attentions to the roects or the comanies. It is clear from () and (4), that financiers can adot F m measures to maximize n. is an imortant variable for entrereneurs to set, because it affects individuals invest or not. Maximize V ab may lead to U f, because the amount of C, C is difficult to change. Under the obective of rofit, financiers always try their best to realize F m n and V ab. Definitely, is critical for both financiers and investors. In this way, caital seeking ventures are also take art in incentive mechanism. C. Incentives of Platforms latforms are intermediary between roect sonsors and crowdfunding investors, these latforms weaken the information asymmetry and save the cost of transactions[8]. Also latforms are indeendent enterrises who urse rofit. Platforms always obtain rofits through charging a certain roortion of the amount of successful roects funds as commission, and we define the rate as θ, usually θ is higher in creative roects comared to other kinds of roects, because they have a large uncertainty during the whole rocess. As is known, Kickstarter charges 5% of the total amount of funds while Dian Ming Time charges 0% initially. latforms charge fees according to total financing funds of the roects, the rimary obective for them will be maximized the number of roects[5], so it can be denoted as follows: U F Ct u ormal ( g, h) r4 (5) M --- the actual amount of funds each roect obtain; ---the amount of roects; and the total value of transactions is: 2 2 (6) F --- the fees from other suort services that latforms rovided, such as financial audit, technical consulting, transaction matching, and so on; Ct --- the total cost for latforms to oerate; u --- the social utility that latforms obtained from equity-based crowdfunding; DOI 0.50/IJSSST.a ISS: x online, rint

4 r4 ---the risk that latforms should be take like verification of the qualification; --- the residual error term. ormal( g, h) reresents other social utilities when crowdfunding latforms work as intermediary between sonsors and investors, for examle, there will be more attentions on the latform with its high credibility. Platforms try their best to romt the transactions between financiers and investors, usually they claim that investors qualified all have rich exerience in investment[9]. Thus they attain their target rofit and realize rofit. IV. EQUITY ICETIVE MODEL I HIGH-TECH PROJECTS With a good growth in high-tech roects, they attract more attention on the crowdfunding latforms. And more and more high-tech roects are resented to financing; the lans are feasible due to mature suort of technology and broad market rosects. However, the amount of financing in high-tech roects is relatively large. We also discuss incentive mechanism of these roects along three dimensions: investors, financiers and latforms. A. Incentives of Investors Most of investors choose high-tech roects to invest attributes to the recognition of the high seed of develoment with its technology, high value-added ability, and in front of contemorary economics. The utility of investors can be denoted as follows: U i V0 F P S ormal( i, ) l i (7) V0 ---the basic value of roects that investors recognized; --- the reference of investors based on the feasibility with roect itself; P --- the funds that investors aid; S --- the shares and other rewards obtained from the entrereneurs. ormal ( i, ) means other utilities which affect the total utility, and some unexected factors are considered here. Also, investors articiate in a certain high-tech roect in equity-based crowdfunding can witness the growth of enterrise, this may induce an utility for investors, this can be described as, l is losses for investors that they should undertake under the risks. i is a residual error term. Here we can see that the incentives of investors based on high-tech roects are related to investment reference, the recognition of the value of roects and the share stakes from financiers. Other social utilities and risks are also have an effect on investors utilities. B. Incentives of Caital Seeking Ventures As for high-tech roects, the amount of financing is large relatively, so caital seeking ventures resent their roects on crowdfunding latforms in order to get more funds. On the basis of high rate of return, investors are more incline to invest rather than consume, then assume that individuals are homogeneous with resect to benefits under rofit sharing[0]. So the utility of financiers in equity-based crowdfunding based on high-tech roects can be resented as follows: Uf mn G C0 P C ormal ( k, l) l f (8) M m n means funds that financiers obtained from individuals, and m n 22 (9) G --- the funds from latforms, here we assume that latform can invest in high-tech roect as an indeendent organization; C0 --- the cost of the roect itself; C --- the amount of fees aid to latforms, this involves not only commissions, but also fees for strategic guidance and other services that latforms rovided, generally it is lower than creative roects ; ---the rate of share rofit that financiers set to marked as a return to investors, usually lower than of creative roects, and 0 <, usually around 0% from resent crowdfunding latforms like DaJiaTou[]. ormal( k, l) means all of the social utilities financiers gained by resenting roduces on latforms. l f is losses under technical risks and is also a residual error term. C. Incentives of Platforms As intermediary, crowdfunding latforms are indeendent organizations that they can invest in roects they referred. They urse rofit so they rovide various services, esecially off-line matching, to attain successful transactions as much as ossible. Here latforms charging a lower roortion of the amount of successful roects funds as commission, comared to creative roects. And the utility of latforms can be exressed as follows: U Bs s S I Ct ormal( m, n) u lr o(0 ) B s s means the total fees of financing funds in equity-based crowdfunding, is a coefficient of commission. And Bs s B B22 B () DOI 0.50/IJSSST.a ISS: x online, rint

5 S --- the share of rofits from financiers; I --- the investment corresonded; u --- the revenues from other services rovided; lr ---the losses under the risk that latforms should be take; o --- the residual error term; Ct --- the total cost for latforms to oerate ormal ( m, n) reresents other social utilities when crowdfunding latforms work as intermediary between sonsors and investors. latforms charge fees for funs so they ursue transactions, at the same time, they act as investors, reference and the ratio of shares are also considered. In this way, incentive mechanism is alied to latforms. V. COCLUSIOS This aer sheds light on the equity incentive model of crowdfunding in creative roects and high-tech roects from investors, financiers and latforms resectively. The results show that investors focus on consumer reference, the quality of roducts and the utility of articiating to maximize utility in creative roects, while ay attention to the value of roect and investment reference in high-tech roects. All investors care about the share stakes from financiers. The amount of funds that each investor invests in and the total number of investors is critical for financiers, however, the crowdfunding latforms is also imortant for high-tech roects. As for latforms, they try their best to romt the transactions between financiers and investors and rovide them with other services to realize rofit. The results also indicate that every articiant should take risks or losses into account, and incentive mechanism is sread to all of them in order to realize their own obectives, in other words, incentive mechanism exists among each articiant. The results will be useful for develoing a good atmoshere for equity-based crowdfunding. ACKOWLEDGMET This work was financially suorted by Social Science Fund Proect of Beiing--Research on innovation incentive equity crowdfunding mechanism based on small micro enterrise in Beiing". REFERECES [] Qiu Xun, Chen Yue bo, Equity-based crowdfunding:financing mode,value and risk regulation, Internet finance, vol.9,204, [2] Song Keun, Lv Xiaowei, Analysis of the develoment of crowdfunding website in domestic, Business Economy,vol.8,204,4-5. [] s otential for the develoing world,204. [4] Huang Ling, Zhou Qin, Study on Heterogeneity of Financing Incentives and Selffeedback Mechanism in Creative -- The Case of the Demohour, China industrial Economy,vol.7, 204, [5] Agrawal, A., C. Catalini, and A. Goldfarb, Some Simle Economics of, national bureau of economic research, Massachusetts Avenue Cambridge, 20,.-46. [6] Ethan Mollick, The dynamics of crowdfunding: An exloratory study,.journal of Business Venturing,vol.29,204,.-6. [7] Kleemann, Frank, G. Gunter Voss and Kerstin Rieder, Un(der)aid Innovators: The CommercialUtilization of Consumer Work through Crowdsourcing. Science, Technology & Innovation Studies,vol.4,2008, [8] Lehner, O.M., Social Ventures, vol.5,20,289-. [9] Yang Dong,Su Lun ga, The oeration mode of crowdfunding latforms and risk revention, ational rosecutors college ournals,vol.4,204, [0] Belleflamme,P., T.Lambert, and A. Schwienbacher, : Taing the Right Crowd, Journal of Business Venturing,vol.29,204, [] htt:// DOI 0.50/IJSSST.a ISS: x online, rint