Big Talk About Small Business

Community Rounds: Beyond Traditional Crowdfunding

• Big Talk About Small Business • Season 1 • Episode 132

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Most founders try to raise money by pitching people who don’t understand their market, don’t share their mission, and still want control. We sit down with Read Ezell from WeFunder to explain a different option: a community round, where your customers and supporters can invest alongside bigger checks and help you build momentum you can’t buy with ads.

We get practical about how Regulation Crowdfunding (Reg CF) actually works, why the JOBS Act matters, and how WeFunder uses an SPV structure so you don’t end up with hundreds of names cluttering your cap table. Reed shares real examples, from neighborhood hospitality to mission-driven companies, and why early-stage capital is often emotional and relationship-based even when people pretend it’s purely rational.

We also dig into the nuts and bolts founders worry about: how often you can raise, what financial disclosures are required at different tiers, and why entity choice (C-corp vs LLC vs S-corp) can make or break the admin burden. Then we tackle deal terms like SAFEs, valuation caps, preferred equity, convertible notes, and when revenue share can fit. Finally, we address the big truth of private investing: liquidity is limited, so expectations and communication matter as much as the raise itself.

If you’re thinking about fundraising for your small business, listen, take notes, and share this with a founder who needs more options. Subscribe, leave a review, and tell us what kind of business you’d actually invest in.

Subscribe and tune in for new episodes of Big Talk About Small Business with Mark Zweig and Eric Howerton. Each week we focus on practical insights and real-world strategies to grow your business!

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Welcome And Capital From Community

SPEAKER_03

Some of the companies that we're working with are uh raising, like I said, raising venture capital and using our platform as more of like a community engagement and marketing ploy than anything, right? It's like uh missionally or like they just want they want their customers to be able to invest, right? And this is the the mechanism that allows them to do that.

SPEAKER_05

We kick it off the same way every time. Okay. Because we're boring as hell. This is another episode of that big talk about small business. Businesses.

SPEAKER_04

Different every time, my friend. It is. We we like to mix it up. So today we're with Reezell, and Reed is again it sounded like you said Rezel. Reed Azell. Is that not the proper pronunciation?

SPEAKER_03

You don't call it Zell actually, but it it's easy to drop the E. You cut it. It's easy to sound a little bit intoxicated saying my name. I think you have the lines together.

SPEAKER_04

Reed Zell. Read Re Reed Zell. No, we've got uh Reed Azell here with it. Read Azelle. And I got acquainted with Reed first through the WeFunder.com platform. And that's why we wanted to get him on the show today because that is a crowd, what do you call that? A crowdfunding platform? It's not exactly that.

SPEAKER_03

Yeah, we like to avoid using the word crowdfunding. We we call it raising a community round. Um I think you know, crowdfunding sounds like something that, you know, it sounds like a Kickstarter, it sounds like something you're doing. Yeah. You know, we really like to lean into the the the idea that we're we're opening up angel investing to anyone, right? It community around hill aligns is more more with uh a traditional venture round or other types of equity funders.

SPEAKER_04

So could they with the community round funding platform of WeFunder.com, like I said, um I'm just kidding, Reed. Um, but it's really been interesting for me. I knew nothing about Wii Funder months ago when I first reached out to them. I was um turned on to them by Luke Regnier. He's been another guest on our show. And Luke suggested that with one of the companies that we're both involved with as owners, that um we take a look at WeFunder as a way of opening up the equity to a larger group of people, particularly this very loyal customer base that we have. Yeah. And uh, you know, I'm not gonna say it's been easy necessarily in every way, but it it has been successful, and we have raised a significant amount of equity capital from a completely new group of investors because of WeFunder. So, Reed, tell everybody a little bit um first um uh about yourself, and then I want to get into WeFunder, and you can tell us all how it works and how that would be helpful to many small businesses out there.

Why “Community Round” Matters

SPEAKER_03

Yeah, I mean, um I'm excited to be here. Thank you. Obviously, you guys you guys are focused on kind of the practicalities of building funding, running small business. Um that's something that one one part of that is something I spent a lot of time thinking about. Um my name's Reedy Zell, like I like we said at the top. I'm based in Nashville, Tennessee. It's where I was born and raised. Um WeFunders are based in San Francisco, but I found my way to WeFunder kind of by a circuitous route. I uh when I I left home and spent most of my 20s living in other countries. Um I was a consultant, I was a teacher, I did I thought that for a while I was gonna be an academic. Uh once I got into that, realized that that was really not what I wanted to do. And I not in the financial services industry at all. Uh most of my 20s just been in in Egypt, Saudi Arabia, and Qatar. Um, I when I came back, I what I've always been interested, though, is kind of interested in those these kind of big problems creating kind of opening up more access, right? When I first went to the Middle East, it was about helping people understand more about that part of the world. As I got older, I realized that I could have more impact back home. Uh that's what brought me back to Nashville. Um, and I really fell into working at Wii Funder um kind of accidentally. I founded a nonprofit when I moved back home to the country, uh, back back to Tennessee, piloting a social impact uh experiment, piloting a guaranteed basic income in a in a specific neighborhood in Nashville, which is back kind of six or seven years ago now. Um and I met uh the president of WeFunder who lives in Nashville as well, through that. Um kind of my experience fundraising for that initiative and my experience trying to figure out how to do this thing from with without much precedent was kind of what led into me working at WeFunder. Um it was also a realization that I didn't want to stay in the nonprofit space. Um but really at WeFunder, what I do now is I help founders raise capital. Uh I helped them understand was a new way to raise money, uh, different than traditional bank debt or you know, venture funding. I think WeFunder kind of can slide up and down the scale closer to either one of those, but generally fits in the middle. Uh, and engaging communities of folks uh to be investors in their business. Uh, we talk about letting your fans and community invest in your company. Um uh and I I think it's a it's a can be a really powerful mechanism.

Reed Azell’s Path To WeFunder

SPEAKER_05

Hey, Ray, going back to the very first comment you made when Mark uh incorrectly called you a crowdfunding platform, which I apologize about that. Like obviously everybody knows that except Mark. Mispronounce my name. Yeah, right. Mispronounce your name. Got your what you guys do completely wrong.

SPEAKER_03

I mean, uh I mean it is what we do, right? Fundamentally, fundamentally, what we're doing is letting any like so to take even a step back from crowdfunding and what WeFunder does today, right? WeFunder was started by a couple folks who were young entrepreneurs and they felt it was silly that they couldn't invest in their friends' businesses. Right? They're not rich people. They're they're people that are you know working alongside founders every day, and they wanted to be able to write a$1,000, a$5,000, you know, a small check into their friends' businesses to support them. Uh it turned out that was ill that was illegal. Um, you know, under in traditional uh uh under the SEC regulations, I think it was 1933 until 2016, it was illegal for someone who was unaccredited, meaning um they had a net worth of under a million dollars or an income of under a quarter million dollars to invest in a private company. Um the founders of WeFunder WeFunder actually started as a petition to uh ask Congress to include in uh in law the ability for regular folks to invest in private businesses. Um and that's how we funders started. Um what year was that? The law was called the Jobs Act. It was passed in, I think it was, you know, developed in 2012, passed in 2013. WeFunder went through Y Combinator in San Francisco in 2013. It then took the SEC about three and a half years to put rules around this. So regulation crowdfunding, which is what the regulation regulators call this, has been legal since 2016. And what it allows is anyone to invest uh small amounts in in a company. Now, there's been a little bit of a circuitous route since then. I would say the way that the regulations worked initially wasn't all that great. They're iterating on the on this. Um, but you know, WeFunder basically started as a uh on the belief that it's un-American, that you can't, you know, you can go to Las Vegas and gamble your money. Why can't you invest in a risky startup?

SPEAKER_05

So and I guess the way that it all works is like it ends up, I mean, are all the people that are investing, are they kind of falling underneath a single, like is it like a single entity that they're basically Today?

Jobs Act And New Investor Access

SPEAKER_03

Yes. So in the way that it was original, when I say that the regulations didn't work all that well at first, um today, if you're investing on the WeFunder platform, in 99 out of 100 cases, you're investing into an entity called a special purpose vehicle, which uh in startup investing is a very established term, but most people don't know what that means. Basically, it just means that you're actually not investing directly in the company, you're investing in an LLC that is then pooling that the capital of a lot of people investing directly to the company. And so what that means for the company is that rather than adding a thousand investors to their cap table, they're they're adding one. There are a thousand people represented in their cap table by that LLC, which is very important for companies that want to raise multiple rounds of capital. You can't having a thousand people on your cap table if you're a really early stage company, um, and you want to raise, for instance, venture capital, is going to be a very big red flag. Um, but yeah, so it's it's a single line in your cap table. Anybody can invest. And the ways that that works, it's it's pretty various, right? Um, some of the companies that we're working with are uh raising, like I said, raising venture capital and using our platform is more of like a community engagement and marketing ploy than anything, right? It's like uh missionally or like they just want they want their customers to be able to invest, right? And this is the mechanism that allows them to do that. Um one of my favorite races of all time, though, is a is a wine bar that's about four blocks from my house in Nashville called Bad Idea. Uh uh the the the guy who started it was uh um you know he was a Somolier in fine dining restaurants in Nashville for a decade. Coming out of the pandemic, he wanted to, you know, run his own place. And he he said what he said is he'd spent a decade convincing, you know, telling people that starting a wine bar in Nashville was a bad idea. That's where the name came from. Um but you know, I I pitched him on, you know, rather than going to a restaurant group and sharing 50% ownership with a restaurant group that would then want to have a pretty significant say in terms of how he ran his business and maybe even push it away from you know being a wine-focused restaurant to something that traditionally works better in our market to be you know a more you know food-focused restaurant where the margins are a little bit better or but where the where there's a more of a margins aren't better, but there's a more proof and mall. He decided to raise on weed funder. He raised three quarters of a million bucks on WeFunder. You know, he had a couple bigger, he had a couple of backers lined up before, but he raised that capital from I think around 150 people. You know, some of those were people in the neighborhood. Uh, some of them were people, a lot of them were people that had known him from uh coming into and in into restaurants that he'd worked in over the over the years. Some of them were you know fellow restaurant, uh restaurant, you know, hospitality workers that just wanted to support him, right? And people, you know, people supported him at um you know$100,000 and uh um and$100. Sorry for the I don't know what just popped up in my camera. Yeah, what? Um but uh you know that I that's that's not a venture capital raise. It was about engaging people that wanted to see this thing happen and that believed in him. And ultimately, that's what I think early stage capital is about. Uh, even if you're talking to a venture investor, right? They're investing in the team. Who knows the team better if you don't know venture capitalists than the people that know the people that know you personally?

SPEAKER_04

Yeah, I think the Janice um capital raise or Paragon Motorcycles Inc. Um reflects that too. I mean, we just have people who they like our product or they have dealt with the company as a customer in some way and they and they like the company. And it's not necessarily a purely rational decision like a typical, you know, private equity or venture capital investor would make, where it's like, okay, well, I need to get a 10x return in the next three years. You know, it's it's much more emotional than it is necessarily logical.

SPVs And A Clean Cap Table

SPEAKER_03

I well, first of all, I would argue that a lot of venture capital investments are more emotional than venture capitalists would would like to admit, right? Like people wouldn't there's a lot of gut in that industry as well, right? Sure. And there's a reason why venture capital tends to, you know, is is really weighted toward people that look like venture capitalists, meaning, you know, white male founders that went to really great colleges, right? It's like that's not that's not because of that's because of just everyone believes in the people that look like them because they know that they did they did a thing, right? I I I don't I think that's a kind of a uh on a um a very understandable bias of that industry. Not that it's good or you know, I don't I I think that you could probably argue that it's a it's a very bad thing, that that um kind of inequality in the distribution of capital. But um but yeah, you're a wee funder, you're tapping into a different kind of approach to investing. Doesn't mean that you're not gonna see a return, but a venture capitalist is you know has to invest in a company that it they they're investing in the companies that they think have the most likelihood to return their fund, right? That the logic of venture capital is that every company that I invest in needs to have the potential to a thousand X. Right? There are a lot of businesses out there that have the potential to 10x. And I don't need to, and I don't need if I'm not a venture capitalist, I don't need to, you know, I can I can invest in those businesses. Um and so it open it kind of opens up the logic a little bit, right? Invest in passion because you know maybe you're just investing because you like the person, but also maybe you because you're closer to in in Paragon's case, right? Like you know the motorcycle industry, you see the potential of small displacement motorcycles. Venture capitalists aren't going to invest in that because it's definitionally a niche market. But like if you've seen that grow and you believe in this this company, go ahead and invest. Um, and we think that there's a lot of knowledge and a lot of like potential returns in investments like that.

SPEAKER_05

What what so tell us a bit more or read on the mechanics here? Like, I guess first of all, does it does it matter what stage a company is to get involved to to engage with WeFunder?

SPEAKER_03

No. Um now it matters what stage a company is to how much money they could raise, right? Um and I think that that's one of the biggest pitfalls that we see is you know, people come to us and they're like, hey, we want, you know, the most you can raise uh in under the regulation that we traditionally work under is uh called you know regulation crowdfunding, uh, is$5 billion. Now, to do that, you need audited financials. There's some friction there to be able to do that. But most of the companies that I talk to shouldn't shouldn't set out to raise$5 billion. What they should set out to do is engage a community, and they should set out to raise the capital that that community can support. And then they should use the Wii Funder platform to expand that community, right? What the power of regulation crowdfunding does is allow you to accept anybody as an investor and then you two publicly solicit for investment, which you can't do in a traditional fundraiser. Okay. That public solicitation is in some ways helped by WeFunder, but it could also be, you know, um to email, you know, getting your friends to email their friends. Yeah. Uh, or sure, you know, getting getting on a podcast and talking about the fact that you're raising capital, right? You can kind of expand your surface area of investors that way. And so I I think one of the biggest mistakes the companies make is they think, okay, I need I need X amount of dollars in the next two years. That's what I want to raise on Wee Fund or today. Really, what you should be thinking about is okay, I've got X amount, I've got a community of this size today. And I think that I can reasonably expand that community through this process from X to you know 2X or 3X and estimate that the amount of money that that could represent. And may it, and the most effective companies that we see do this are doing it repeatedly, right? Like you build a community over time that stays engaged and sees your growth and follows your story, and that's where this becomes incredible, very powerful, right? Um it's not I'm gonna raise$2 million in the next two months from a bunch of hundred dollar investors. It's I'm gonna raise maybe it's$200,000, maybe it's$500,000, maybe it's a million, that I'm gonna then continue to engage them and build in in kind of uh bring them into the process of building the company. And then it's not just about money, it's about um, you know, community engagement. It's about having a you know a built-in street marketing team of people that are gonna go out and try to help you make connections. And if you hit some milestones, those same investors are will are likely to invest again because on paper you've increased the value of the city.

SPEAKER_04

That's the key right there. It's it's performing, and then you make believers out of them, and then they become so you can do another round?

SPEAKER_05

Yeah. How many rounds can you do? You can do it every year. As much as once a year, basically. You can do once one time per annual per year.

Wine Bars Fans And Emotional Capital

SPEAKER_03

You could you could you could launch multiple raises in a year. The the caps in terms of how much capital you can raise are set in a 12-month time span. Okay. So they kind of that number resets. Uh so explain that. If you're raising a small yeah, so the way the regulations are set up uh for regulation crowdfunding, right? There are three kind of tiers of a reg CF raise. And so uh and there's different a different set of um financial disclosures that are are necessary uh for those three different levels. You can raise up to$124,000. Basically, you the kind of the biggest downside of Reg C F or friction point around Reg C F uh is you are publicly disclosing your financial statements. But under$124, they are just self-compiled. Up to$1.24 million, you have to get a CPA to review them and say basically, yeah, this makes sense. And then above$1.24 million, you have to get those financials audited, up to$5 million. And so raising repeatedly does create you, you have to basically build into your business that you're gonna keep your books clean and and um uh get these, uh get a review or an audit every year. Um, you know, the first time people do that, it tends to be very painful, but then if you keep things in order from there, it it becomes less painful. But but yeah, I mean you could raise repeatedly. Um the way that we think this should be done is kind of it's not about Reg C F, it's not about the regulation, it's about the philosophy of capital. It's this is a this is a different way of a different source of capital. Like I said, bank debt, venture capital, traditional angel investors, all those are people that you might go to. Your community is just another among those, and we should be stacking that that alongside all those different sources of capital. Um but yeah, the the value though is the public promotion of this, right? So I you know I'm biased, but I think a way that a company should do this is if you're gonna raise money, set up an account on WeFunder, start building a community, start communicating with them, run a fundraise, uh, continue to communicate with them, update them, and then maybe in 12 months you do another fundraise, right? It's it's it's not you're you're building this kind of muscle of communicating with your community into the operation of your business. And what it does is create options for you, right? If you are a company that's on the venture ladder uh and you haven't hit the milestones in, you know, at the end of 2026 that you want it to, your customers are probably like, if they like what you're doing, are gonna be ready to invest to help you get to those milestones so that you're ready for your next venture raise. There are a lot of companies out there that aren't on that venture ladder, right? Um, rather than taking on debt, what this is is basically friendly capital from the, in Paragon's case, motorcycle owners in bad ideas case, wide enthusiasts, right? That um are you know trading access and you know, they want to be in the in the process, but they're willing to help you grow the business.

SPEAKER_05

So it's like somebody should look at this as like, I went public and I'm now I'm doing shareholder meetings, I'm taking care of you. You want you don't want your shareholders to start selling stock.

SPEAKER_04

Yeah, I think the thing communication. Yeah, it's a good discipline, probably to have just in your business in general. You're not commingling your personal stuff with it, because that would be wrong. You've got to have good account. Accounting, right? And you've got to have good information sharing with your owners. Those are all sort of good disciplines.

SPEAKER_05

Hey, Reed, when you're can you hear Mark chomping on his chewing gum when you're talking? Because I mean, I'm sure. Okay, our audience. Sorry about that audience that Mark is continually smacked in the microphone, but I'll get back to the business part of it.

SPEAKER_04

I got the gum from you.

SPEAKER_05

I just didn't know you were going to be like putting your face against the mic and like smacking it. Should I do it again? Yeah. I can hear it now after moon. It's disgusting, isn't it? Oh, no worries.

SPEAKER_04

Anyway, I just want my lips open for that thing.

SPEAKER_05

You know what I do like, Reed, but one thing you're talking about. So I get extremely irritated. I'm like a really bad Capital Ranger with because I get so irritated. And you made a really good comment that I wouldn't point out to the audience. My irritation comes whenever I'm sitting here, I got this company. Take podcast videos, for example. We know podcasting's growing like crazy. It's actually outperforming radio now. There's more listeners on podcasts and our radio for the first time ever. So it's overcome a major media outlet. But that's that's just the podcast part. Then you got video. YouTube's the biggest media company under the sun. And it's all video. All social media is using video. And then I go to uh, and so we do both, right? Yep. At our company called Podcast Videos. I go your firm does again, Eric. Podcasts and videos. That sounds like a good thing. Right, yeah. I mean, like obvious. But you go to investors and they're like, man, I don't know. I don't know. And you have to explain to them 17 hours worth of explanation. They want to see a bunch of stupid data points, and they still leave. And like you mentioned before, it's like, how freaking obvious is this in is this business that we're in that you can't even get past the thought, and but you're poor money some of the dumbest things I've ever seen my entire life.

How To Plan Repeat Raises

SPEAKER_03

But show them show them, don't tell them. Right, exactly. Right? You shouldn't, you should like the biggest mistake that I think, you know, I've never raised equity capital. I've helped a lot of people doing it. So, like, you know, I I don't I don't claim to be an expert here. Like I said, I I ended up in this kind of by accident. I've loved my job and I love helping founders raise capital. But the state the mistake that a lot of first-time early founders make is like they're they're heads down in the business and then they decide they need to raise money, and that's when they start trying to talk to investors, right? Where what you should have been doing is telling investors about all the things you're doing heads down in the business for the past six to 12 months. Because then you don't need to spend 17 hours, right? You've built that you've gotten buy-in. Not every investor is your investor, and the ones that are your investor will have stopped following your updates, right? And so the people that are there are the ones that are there for you.

SPEAKER_05

Well, the one the the big point I was going to make, though, was as you mentioned, motorcycle enthusiasts investing in motorcycles, wine enthusiasts investing in the wine business, people that like podcasting investing in podcast videos, people that are social media video creators investing in a company because they know they understand, they understand the goddamn market, and they don't need a bunch of freaking other types of objective leverage going on. I'm like, I'm a wine enthusiast. I really appreciate wine. I can see why people would come to this place. Sure. You're a great business, you seem like a good person. Yeah, you've done this before. Here's 250 bucks, here's$5,000, whatever. That's that community thing that you're talking about. That's when you said that, that kind of gave me a little bit of a breath of fresh air that there's a different way for a founder to capitalize their business with a community, like you're saying, that can support them.

SPEAKER_04

Yeah. And and the other thing is that they, like Reed said, I think early on, is they're not necessarily going to try to control your business and miss and and take you off the rails, which we all know. I mean, I call it the golden rule. He or she has the gold rules. Yeah. And of course, you and I both talked about that. So many founders, they're stuck in this ridiculous model of I come up with an idea and then I go out and raise and I do my business plan and then I go raise outside equity capital to investors who immediately now control my business. So I wanted to be self-employed, now I'm not self-employed.

SPEAKER_05

Yeah, you're you're in a very risky employment. You basically quadrupled your risk and you're still employed.

SPEAKER_04

I think the other thing too is it makes it easy for somebody like yourself. Let's just say as an example, if you wanted to take podcast videos onto WeFunder, it gives them a chance to know a little bit about you and your success as a business builder and entrepreneur and exit and you know, and successful exit guy without having to do that yourself in a real, you know, you're kind of self-conscious. Like you wouldn't go to somebody and brag and go, hey, you know, I've done that. But if they see the story right there, yeah, they can read that and they know a little bit about you now. And it, I think it's going to build more trust. Yeah. You know, that I totally agree.

SPEAKER_03

I think it's like it's it's a really big miss. But it's it's also it doesn't have to be either or, right? Like we see companies raise our WeFunder, and it's actually it becomes the proof point to the bigger investors, right? It's like a story that we've told for a long time. This is before my time at WeFunder, but it was a company called Um I started to tell the story, and now I'm getting the name of the company. Um they were they were working on a solution for just to to um to solve uh cure cancer in dogs, right? They went through, you know, they're they're trying to raise venture money, but this is like a big problem. And they were talking to investors, and um, and the investors were like, hey, yeah, we don't really see the market here. Like, who's gonna spend you know$10,000 to on a treatment for their dog? They came together and they raised exactly people people that like love their dogs will will do that. They raised they raised like$300,000 in 2017 on a WeFunder. Uh and then they took that, like the the like customer validation of investors in like being passionate about this problem and went and raised you know a seed round and and and and have grown the business. Uh there was an update recently, you know, they'd like just made a they just passed one of the tri the trial milestones, right? There, they've been they've been building, they've been able to continue to build this business. And it started by being able to engage the community, right? Like um another another founder that I I've met through WeFunder is a company called Adam Limbs, right? They they have like a DARPA grant to build kind of AI uh prosthetic limbs, right? So like targeting veterans. Uh uh you know, that that's a that takes a long time to build that company. But what what the founder of Adam Limbs said is like you know, go go lean go go lean into your weird, right? You don't need to be everything to everyone. Go find the people that like love and resonate emotionally with what you're doing and turn them into your investors, turn them into your community. If you can start there, you can expand, right? But like just go go find the people that believe in what you're doing, right? Whether it's because of you, Eric or Mark and what you're doing and your track record, or just because you've you're you're solving a problem that there's you know, one half of one percent of the world relates to that problem on like a like a fundamental visceral level, right?

SPEAKER_05

Those are the people that are in your community. So once once the money's raised and it's all under that SPV special purpose vehicle, then it's that's in an LLC. Does it have like who who is the representation for that LLC?

Disclosures Audits And Corporate Structure

SPEAKER_03

Um traditional, so uh it's it's interesting. WeFunder is actually undergoing a pretty big evolution right now. Um really actually, you know, Mark, I met you through the the Paragon uh or Janus slash Paragon motorcycles raise. Um since that race, we now support Reg D, meaning traditional uh angel investment as well. Um and with that change, we made a big change in terms of our structure. In the past, we required companies to have a lead investor in their Reg CF race, and frankly, made it sell it, made selling the platform harder. But we basically said, okay, if you're gonna race from retail investors, you need to have at least one person with some like some significant skin in the game that's investing on the same terms, it's gonna offer those people representation on the platform. Um today that that's no longer required. The founders can be the sign, the proxy designer for the for for the SPD of We funder. Um the reason we're doing that is because it aligns with reg D fundraising and how people operate there. Now, I we still really believe in having a lead investor. And if a company is trying to raise on you know what I view as what we see as you know, out-of-touch terms, we'll probably still say, hey, like if you we're gonna host this raise, you need to bring in somebody writing a significant check on these terms just to like prove that there are real people out there that want to invest. Yeah. But but um from a control perspective, Eric, um, you know, the the founder can be the signer, the proxy signer for that SPB.

SPEAKER_05

Sounds like a great odd great deal for a founder. I mean, you have like that that has no there's no it's not voting stock, obviously.

SPEAKER_03

We we don't common stock raises on WeFunder. So it is the the the the founders that the investors are investing in preferred shares that have preference over common, but they're not delegating rights to somebody that might work against them. Does that make sense? Yeah, so it's non-voting preferred stock.

SPEAKER_04

Yeah, most people don't realize that really preferred stock, in my opinion, is not preferred. But anyway, while I always get into arguments because it because it doesn't have voting rights, okay? But it has like preferential for like sales or whatever, right? Yeah, but if most of the time it functions like debt more than it does equity. But anyway, we could have that discussion.

SPEAKER_03

We we do that because we think that like most angel investors are investing on preferred, and so we think that our angel investors, micro angel investors that we fund her deserve the same right. I I think you're right, Mark, that in most cases it's like not actually gonna end up being that much of an issue. And you're right, if there was like a liquidation of assets, the preferred investors are just getting, you know, the the that that first. And it does kind of function like that. But really, what we're trying to avoid is uh uh a venture investor or some big investor coming in later and getting preference over the you know the retail investors just because they were small check investors.

SPEAKER_04

But let's go back to though to the legal form of the entity that is raising capital on WeFunder. So let's uh uh you know I know in our case we were a C Corp, which makes it very easy because other entities can own um ownership in a C Corp. But if you had an S-corp, it's not gonna work. Is that not right?

SPEAKER_03

Yeah, you can't you cannot raise you cannot raise via Reg C F as an S-corp.

SPEAKER_04

But you can as an LLC, though. Is that right? Yeah, you can as a BLC Corp.

SPEAKER_03

There are some complications as an LLC, right? As an LLC, because because an SPV is an LLC, uh, try not to because the entity that people are investing is an LLC, an LLC raising or we funder doesn't offer the same simplification uh of the cap table that um yeah I've never been a C Corp does. So you'd have to you'd have to issue K1s every year to all the all of the investors, which if you have a very successful raise, becomes a pretty big job. Um it's our strong ref pref uh recommendation to anyone trying to raise more than like the 124k level is you should either convert to a C Corp or choose you can stay in a LLC and be taxed as a as a corporation, right? You just make a tax selection. Um but that's if you're raising equity, you really should do that just because it creates a lot of like room for error.

SPEAKER_04

I'm a big fan of C Corps anyway today. I mean, first off, the tax well, the tax rates are lower than individual tax rates. That's a that's a big plus. And if you do want to preserve, um, if you want to retain earnings and you're not trying to pay out a bunch of profits along the way, you're trying to grow your business, C Corp's just a better structure. It's easier to retain. Because the the the money that an S-corp or LLC makes is a pass-through entity. Whether it you take it out or not, it's taxed. Because the company's individual level. Because the company made the profit. Yeah, if the company makes$100,000, let's say, and you're the sole owner of your LLC, you get the K1 that says I made$100,000. You might not have gotten any of that. Because you've been putting it back in the business. You've been putting it back in the business. So the way the IRS views that is you made$100,000 and you reinvested, you pay tax on the$100,000. With an with a C Corp, you only pay corporate tax based on what you made, and the corporate tax rates are lower. Like your individual tax rate or mine is going to be higher than a corporate tax rate by far today. It's what is it, like 21% or something? It's low. It's in the 20s. It's in it's in the it's in the 20s. It's very low now compared to your individual tax rate. And so that's the reason. It's just easier to retain earnings. Plus, it's sort of the most legitimate legal form of organization that gives you the most flexibility. Is a C Corp like the oldest? Yeah. They're all all corps start out as a C Corp, and then you can file an election to be taxed as a subchapter S. They all start as a C Corp. Even LLC. No, LLC is a limited liability company. That's a totally different entity. Well, but I mean, like, what's the original corporate structure?

SPEAKER_05

Corporation would be a C Corp. C Corp. I'm just thinking like back in the day when all this stuff really because we had that one episode we were, and this is kind of cool, Reed, we were talking about I was doing my history stuff, but one of the big reasons that the writers of this book, American Entrepreneur, gave for America being so successful and in being our strength that we are, is because of our legal laws that we have related to corporations and how individuals can set up entities and are protected. That outsurvive them. That have outsurvived them and all that versus Europe versus Asia. Like it's the way the American legal system is set up is allowed us to be the country that we are. And I just wonder if it was C Corp, was the LG. Yeah, that's the original. You think so? Yeah, oh, I know so. Oh, you know that as a fact.

SPEAKER_04

Well, I know that that's that C Corp is the is the highest level in the basic uh corporation.

SPEAKER_05

But that doesn't mean it was the original. I mean, like I'm gonna do some fact checking and bust you out on LinkedIn.

SPEAKER_03

I don't, I don't, I don't know that I don't know anything about this. I'm um you got me Googling in the background here to see if I can sound smarter than you guys.

SAFEs Valuation Caps And Notes

SPEAKER_04

But I They didn't necessarily call it a C Corp, but it was a corporation. Okay, that's fair. Yeah. But I I mean, I despise LLCs for a million reasons. I mean, how do you deal with the idea that all members of the LLC operating agreement have to sign off on any changes to it when you've got a Wii Funder as part of your cap table?

SPEAKER_03

We're still we're still putting them into uh a pool, right? And so there's still a proxy, a single proxy for them. The real issue is around K1s and taxes, right? It's like we we actually charge an extra fee if you raise as an LLC because we will we'll do the K1s for you, but it's a lot of work every year. Um and if you choose not to pay that fee, then you're gonna have to do it yourself. And if you raised, you know, the average the average investment on WeFunder, the the media investment is something like$250. The average investment's a little bit over a thousand. But like, you know, if you raise two million dollars, it's a whole lot of K. It's a lot of K1s, dude. Yeah, yeah.

SPEAKER_01

And how does it what I mean?

SPEAKER_04

If you there were uh if you were a LLC and you paid distributions out to your owners, typically you try to do that, at least to cover your tax obligations, in my experience with any pass-through entity. I always tried to pay out 40% at least to cover tax. How do you deal with these we funder investors? They're not going to get those distributions, or are they?

SPEAKER_03

I mean, anything that you you you basically would treat the we funder investors as a single entity and then we split it up for you. So you would send you a single check to we funders.

SPEAKER_05

No reason y'all charge an extra fee. No kidding. My gosh, can you imagine that's brutal? I mean, we also do revenue revenue share on we funder, right?

SPEAKER_03

We do that as well. I think that's a read out of your pocket. I apologize. I'm talking to what were you saying? But you can do a revenue share on WeFunder, right? Like so we cut it up, we do that as well, right? So you where you're you know you're saying you're earmarking a percentage of revenue quarterly, annually, or whatever the timescale is, and you're sending it back to WeFunder, and then we're chopping it up into you know however many pieces uh according to the size of the investment.

SPEAKER_05

That's interesting. But yeah, yeah, so that's a value for somebody to invest, right?

SPEAKER_03

Like they're kind of participating in For a brick and mortar business or something, right? Like we we we that's not our core product, right? Like our product is built is built around C Corps raising equity or future equity, right? The most common instrument that we funder is a safe, followed by preferred equity, followed by a convertible note. Um but we that there are there are businesses out there where a revenue share makes sense. Um, you know, you got if you've got if you've got healthy margins and you're not trying to like scale to be a huge business, but you just want to, you know, maybe you need to raise a little bit of money to build out a storefront. So rather than rather than taking on debt or rather than having new ownership, you you know, you just build your business model so that you know, four or five percent of that of your revenue is gonna go toward paying back these investors, uh, you know, some multiple on what they invested, you know, 1.5x or 2x or something.

SPEAKER_00

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SPEAKER_05

You mentioned something that kind of goes to my next question. I'm gonna make sure I get this in. I'm sorry I'm kind of hijacking this entire podcast.

SPEAKER_04

You're not. I mean, when you got hair that looks like yours, as good as that is. That's what I'm talking about. You can uh you can take the whole thing, man. Thanks, bro.

SPEAKER_05

It's all yours. I appreciate that. So you said safe, like so, like let's talk about valuation. So if I want to raise, if I want to go on a raise, like you can do a safe, so I don't really necessarily have to say what a valuation is. People are just investing like it's a safe.

SPEAKER_03

Raising on uncapped safe on WeFunder, I would really advise against, particularly in this market, right? Like you don't you're just not seeing many uncapped safes. You were back in 2021 when uh people were investing in everything all you know without reservation. Um but the most common instrument is a safe. I most retail investors frankly like you know, look at the valuation cap on the safe and think you know, that's the the um that's the the bottom part of the fraction um when they're kind of thinking about their investment, which is not strictly accurate. Um but yeah, you can raise on future equity. Um the reason I don't I think an uncapped safe doesn't work is it creates hesitancy among your community. And on WeFunder, like we think you should think of the WeFunder investors. There's a million investors on WeFunder, right? They're a force multiplier, and their force multiplication is going to be based totally on you kind of eliminating all of the questions that might be top of mind that might give them pause, right? And an uncapped safe, particularly when you're in a marketplace raising an uncapped safe next to a bunch of capped safes. Why would I why would I invest in that much less certain um outcome?

SPEAKER_04

Once you start talking about safe safes in general, I think it implies a sophistication level of an investor that a$250 or$1,000 investor probably doesn't have to. I mean, think about that. They understand having fractional ownership in this thing.

SPEAKER_03

Yeah, you know, that they can. There are real questions around that. But and I think that's um, you know, investor education is a big piece of what we think about all day long. But though the the what I the place I would push back there, Mark, is also yeah, I think equity is obviously the most understandable structure. But the biggest upside, any deal on WeFund, the biggest the biggest upside deals on WeFunder are all on sakes. Right. So the people that are coming to WeFund are like really looking for interesting. Like an economic upside, are interested in those deals and they're educating themselves. Uh, and I think we funder as a platform, probably like we should probably do more work helping to inform people.

SPEAKER_05

Um uh, you should have your own video podcast. Yeah, you should have more video podcasts.

SPEAKER_04

I know a source for this. Let's talk about it offline. Yeah, I mean, they do everything here. This is unbelievable.

SPEAKER_05

I wanted to close this deal right now, man. Right now. But but on the so explain to our audience about Cap Safe, real quick.

Liquidity Limits Reg D And Wrap

SPEAKER_03

I mean, uh, since you guys are new educate, like Yeah, so the but the way Safe, first of all, sounds stands for Simple Agreement for Future Equity. Uh it's been popularized over the next last decade or so. It came out of Silicon Valley as just kind of a simple way for companies to raise early capital. Basically, what a safe is doing is um putting off the issuance of shares and stock and network and saying, hey, like my company's too early to make any promise, any like hard promise about the value. But what a safe is saying is I'm I'm making I'm basically giving you an IOU for future shares when I issue them in exchange for your capital right now. When I talk about a valuation cap, it's saying uh basically the implicit promise is when I issue shares, it's very likely that the value of my business is going to be well above this cap, but your equity is gonna be issued at or below that cap. And so if I if you raise a million dollars on a the easiest way to think there's pre- and post-money safes, but the most straightforward way to think about them is a post-money safe. So if you raised a million dollars on a post-money safe, meaning after the million dollars is in the business, it's valued at$10 million. The uh when that safe converts on a future financing that's on a$100 million valuation, maybe it's priced at that point, those investors in that million dollar safe will have 10% of the business because they're they will convert to equity at that$10 million cap. Yeah, or the business is sold. At that point, you so your$10 million, you know, your million dollar investment is now worth$10 million if the$10 million, if the$10 million cap is raises price at$100. It's a little bit esoteric, but I think as long as you're talking about post-money safes, it's pretty, pretty straightforward. The the working it out work is easier. You have to factor in dilution and all these things. But the reason safes are used are these are companies that are going to move very quickly and raise a lot of capital before they're kind of establishing a baseline for their business, right? Like uh it's not if I've if I've taught if I've got 10 customers in a market of a million customers, my revenue today is not an accurate representation of what my business the value my business model can create.

SPEAKER_05

Yeah. Makes sense. And then you also do convertible note. Did you say that earlier?

SPEAKER_03

Yeah. Which is similar, it's an older instrument that has an element of debt involved, right? It's like if the if if the if the company fails and doesn't raise capital, additional capital, instead of going poof, the investors have a have a uh there's a debt element where they could be paid back uh with interest.

SPEAKER_05

Yeah, I get I I guess it makes I understand convertible not. I'm just trying to think about it in a we funder scenario. It gets a little confusing on how all those but it's just all the same principle because it ends up being just one investor, basically. It's just a fractional honest, right?

SPEAKER_03

It's just smaller shares, right? So, you know, you raise a million bucks and I've got a hundred dollars in it.

SPEAKER_04

Let me ask one more question, though. I think it's important. Let's say I'm an investor in Wii Funder and I buy$1,000 worth of ownership and whatever it is. How can I ever get that money back if that company is not sold externally? Is there any liquidity to it at all? Ever?

SPEAKER_03

There's a that's a great question. Um, because I think it's the biggest, it's the biggest problem facing our industry, liquidity. There is not a formalized secondary market for private private investments anywhere. Right. I mean, we we facilitate secondary transactions pretty regularly for individual investors. You know, they find they find somebody that they're gonna sell their shares to. But the reality is that um there's no there's not good liquidity. And if you're selling an investment in the company on WeFunder to somebody else, you're probably selling it at a huge discount. Right? The expectation of an investment like this should be I'm never, I'm either gonna, you know, either there's some sort of you know, dividend, like a revenue share or a profit share coming back to me, or I'm probably never gonna see this again. Um which is why, you know, this is why the venture model kind of is built on a lot, making a lot of high-risk bets, and they're looking for big returns to each of those bets. Um, but we I mean we've seen liquidity, like we saw the the first company to raise a WeFunder uh did an IPO six months ago. It's called Beta Bionics, it's a biotech company. We're starting to see that. I mean, these are real issues that the SEC has to deal with, right? In in helping companies go public uh more easily. You know, back in the 90s, people went public with a$50 million valuation. Now, you know, Stripe is worth billions and has no plans to go public. Um you know, liquidity is is a question. My the reason I work in the space is because I think that I think that problem will be solved. Um, but it it it's a it is an issue that there's not um there's not a you know a straightforward solution for right now.

SPEAKER_05

Sure. So about time, what I wanted to make sure we do, right? We've been talking like, okay, our listeners, you're small business, you need to raise capital. We've talked about a lot of complicated scenarios, honestly. Sure. But to but what I'm but I think that give you the last couple minutes here, Reed, to because what we funders value that you're providing for these found these founders is to simplify this process, right? And to help guide in like you know what I'm saying? Like, I think that that's I don't want I want to make sure that the the listeners understand that value after this complicated.

SPEAKER_03

I appreciate you saying that, Eric, because I I I kind of wanted to get there earlier too, and I you know, I I get lost in my own thoughts. Um like the way that if I'm a founder raising state, so weFunders changing as a platform. Traditionally, we've only supported Reg C F. Like I said, uh Mark, we now support Reg D fundraising as well. And so the reason we've done that is pretty we really dislike this this kind of there was a kind of a split in fundraising. People were like, I'm raising via reg D or I'm raising via Reg C F. I don't like it shouldn't matter what regulation you're raising under, right? It should matter who like the the capital that you're raising is the important thing. Uh there are different benefits to different capital, right? Raising from venture capital, they prompt their promises a Rolodex and connections and stuff. Your community is promising loyalty and a street team and friendly, uh, you know, kind of friendly money, basically. Um, if I'm a founder approaching this today, what I would be doing is setting up a page on WeFunder and starting to build my community there. And likely I'm starting my fundraise, closing a few bigger checks via Reg D, via like bigger angel checks, things that only accredited investors can invest to kind of price out my deal. And then only when I'm done with that, I transition to Reg C F. And it's the what Reg C F is offering is the ability to for you and your supporters to help promote that you're raising capital and in empowering you to reach a bigger audience of potential investors. Um and and that that's it. It's like it's just another option to stack in there alongside um a lot in your in your capital raise. Um, you know, I I we're gonna start seeing companies that raise, you know, they might raise a million dollars on WeFunder, but maybe they raise 200,000 from a from retail investors, right? So they raise 800,000 from angel investors and venture capitalists. They're using WeFunders checkout flow to do that. And the reason they're doing that is basically it's simplifying, it's giving you a single point of truth to point all of these investors. It's giving you a platform to storytell about your company.

SPEAKER_04

Yeah, I mean, that's exactly the scenario we had at Paragon. I mean, if you look at the millions of dollars we've raised from accredited investors to start with, it sort of validated the whole thing. And then you go to the WeFunder platform and go, look, this is what's happened, right?

SPEAKER_05

I mean, what I would say would be the nice I'm sorry, but you guys started today with that's sorry. Well, just real quick, what I'd say it'd be nice though is if you started with those accredited investors and we were being pointed to the WeFunder environment, and that's where we were learning and reading and and and kind of you know uh going into, then when you move to the crowd, the the community side, yeah, you're still yeah, your all-accredited investors would have been able, would have had an experience with WeFinder that could have maybe helped you participate in the world. No question, right? Yeah, absolutely.

SPEAKER_03

Because this is exactly yeah, this is exactly we just launched that ability in February. So when Paradon was setting up, we could not support that. We actually haven't even like told we haven't even promoted it publicly. We're gonna we're we're planning to tell everyone on April 2nd. So you guys are hearing this early that you cannot do this on WeFunder.

SPEAKER_05

But that's exactly we just be just we were like the first at bat on Big Talk about small because they break a media network, right?

SPEAKER_04

Breaking news here before April 2nd, though. Well, what's next Thursday? I don't know. What is next Thursday?

SPEAKER_05

April 3rd or something. But what what were your well, yeah, we got you. What were what were your last comments though?

SPEAKER_03

Yeah, yeah, I apologize here. Um what what I was saying is basically like Eric, you you you hit the nail on the head there, right? It's like we've had this false separation, and what we want to create is a place where it doesn't matter what regulation you're raising under, it's the people that are passionate about you. When you you're good, you're the the bigger big checks are gonna come in first and validate this, and you're gonna help build momentum there. And then you open up, you know, maybe once a year you open up for the little checks, right? But it's a it's a single place to talk about building your business. Um, and that's that's that's the important thing, is it's not about reg CF versus Reg D versus venture capital. If you're building a community that's gonna back you, uh it shouldn't matter if I if you're rich or poor, right? It just matters that you're passionate about the problem. And so if you're storytelling there, that you're creating leverage uh and creating the potential of of investment. Um that's what that's what that's what we think everyone should be able to do.

SPEAKER_05

Creating the market. That's it, man. Well, hey, that's a good place to end. Reed, how do how do people get a hold of WeFunder? I mean, what are they? Wefunder.com.

SPEAKER_03

Go to WeFunder.com forward slash raise and start setting up company. Um it's self-service. Arc team will reach out. But if anybody on this podcast is interested, feel free to email me at um read r-e-a-d at wefunder.com. I'm happy to chat with anybody and help them understand how to do this well. Um and yeah, I mean, that that that's it. We're we're we're always here to help.

SPEAKER_04

Well, I I can say that Red's been great to deal with, and he's always very helpful and not condescending and and and um treats everybody well.

SPEAKER_05

So well, it's been nice that that you spent time with us and helped help our audience better understand what's going on. Really appreciate that. Great episode.

SPEAKER_03

I appreciate it.

SPEAKER_05

Um thanks for the time. Well, until next time, this has been another episode of Big Talk About Small Businesses.com.

SPEAKER_04

Thank you, Reid. See ya, Reid.

SPEAKER_02

Thanks for tuning in to this episode of Big Talk About Small Business. If you have any questions or ideas for upcoming shows, be sure to head over to our website, www.bigtalkaboutsmallbusiness.com, and click on the Ask the Host button for the chance to have your questions answered on the show. Stay connected with us on LinkedIn at Big Talk About Small Business. And be sure to head over to our website to read articles, browse episodes, and ask questions about upcoming shows.