Basic principles and definitions of crowdfunding

Crowdfunding is an alternative form of financing, which directly connects those, who are willing to donate, to provide loans or to invest with those, who need funding for the realization of a particular project.

The four main types of crowdfunding are the following: donation-based, reward-based, peer-to-peer lending-based and equity-based crowdfunding.

Project owner
An individual, enterprise or nonprofit organization that launches a campaign through a crowdfunding platform to accomplish a particular goal.

Financier
An individual, enterprise or organization that supports the project owner in accomplishing their goals through the crowdfunding platform. Depending on the type of crowdfunding, the financier may be considered a donor (donation-based), backer (reward-based), creditor (lending-based) or investor (equity-based).

Donation-based crowdfunding
In the case of a donation-based campaign, the project owners are typically individuals or nonprofit organisations whose campaigns serve a social or public purpose. Financiers are considered donors in that they do not expect any kind of reward in exchange for their donation.

Reward-based crowdfunding
This is the most well-known form of crowdfunding. In the case of a reward-based campaign the financiers expect some kind of reward in exchange for the capital they have provided. These rewards are mostly gifts or the final products of the campaign.

Equity-based crowdfunding
Financiers in this case are considered investors. Investors gain equity in the enterprise through launching the campaign in exchange for the amount invested; they become owners. The aim of the investors is to sell their equity later at a higher price, thus increasing any profit on their investment.

Peer-to-peer lending
Financiers in this case are considered creditors. The project owners can either be individuals or enterprises. Project owners pay a formerly agreed interest on the amount of financing. The aim of creditors in this case is to receive higher yields than the market rate.

All or Nothing model
The campaign may have access to the amount provided for their campaign only if their target is fully accomplished. This model is used by equity-based crowdfunding platforms and platforms that provide peer-to-peer lending. Tőkeportál also uses the All or Nothing principle.

Keep it all model
The campaigns can keep all the amount invested, whether they accomplished their funding target or not. This model is mostly used by donation-based and reward-based portals.

IPO (Initial Public Offering)
This is the first time stock of a private company is offered to the public, providing entry to the stock market.

Exit
In such an event, investors can sell their shares in the company. This can be either a buyout, or an IPO. Investors of an early phase enterprise most frequently receive profit on their investments during an exit.

Business angel
Such a person aids the operation of enterprises in their initial phase with their advice and financial support. Angels are usually wealthy individuals with experience in investment, entrepreneurship or relevant industry.

Dilution
A decrease in the ownership ratio of the enterprise when it offers new stock to the public during a new round of raising capital.

Dividend
The enterprise pays a certain ratio (dividend) from its profit (earnings after tax) to its owners. The dividend can be a source of revenue for investors. It is not common for early phase enterprises to pay dividends.