Equity crowdfunding is a method of financing an initiative whereby an entrepreneur sells shares in her firm to a group of people (the crowd) on a dedicated platform. Since 2015, when equity crowdfunding became legal in the USA under regulation A+, it has become increasingly popular, and its potential economic impact is significant. Understanding the forces that shape the behavior of both investors and entrepreneurs in equity crowdfunding platforms can help design more efficient platforms and increase the welfare of all participants. We therefore develop a common value sequential crowdfunding game-theoretic model, where the entrepreneur sells a percentage of her firm in order to raise money for its establishment and then shares the future value of the firm with the crowd. Investors on the platform who visit the campaign decide whether or not to invest in it. Each investor’s decision depends on the amount that has already been invested before him and on his own knowledge about the firm and the market in which it operates (which we model as a signal that he obtains regarding the true value of the firm). By offering a different percentage in the firm, the entrepreneur leads the crowd to a different equilibrium. We characterize these equilibria and then analyze the entrepreneur’s decision. We show that an entrepreneur with a higher ex-ante probability of success (a better firm) will offer a higher percentage in the firm (or equivalently a lower price per share) in order to increase the probability that the campaign succeeds. We further show that the entrepreneur may very well prefer investors that have a less accurate signal regarding the true value of the firm.
Joint work with Hana Tzur