A practical guide to risks, rewards, and realistic expectations (equity crowdfunding edition).
Early-stage investing can be exciting—especially when you believe in the product, the team, or the community around it. But it’s also very different from buying a stock or snagging a seasonal deal. This guide breaks down five essentials every first-time investor should understand before backing a company through equity crowdfunding.
Quick note on terminology: there are different kinds of “crowdfunding.”
Donation/Rewards crowdfunding (e.g., backing a product prototype to receive a T-shirt or early unit) is not the same as owning part of a company.
Equity crowdfunding allows you to invest for a potential ownership stake (equity or other securities) under specific regulations.
Gameflip is raising via equity crowdfunding, not donation/rewards crowdfunding.
1) Do your own due diligence (DYODD)
Due diligence is simply your personal research process—the difference between a thoughtful decision and an impulse buy.
What to review:
The offering page: Read it carefully from top to bottom. Focus on the business model, how the company makes money, and the path to scale.
Team & track record: What has the founding team built before? Are there relevant industry wins?
Traction: Look for concrete signals—paying users, partnerships, revenue growth, unit economics, cohort retention, or meaningful early adoption.
Market: Is the target market large (or growing) enough? Who are the competitors? What differentiates this company right now?
Use of proceeds: How will your investment be used—product, hiring, marketing, inventory? Do those allocations match the stage of the business?
Risks & disclosures: Don’t skip these. Every startup faces real risks (customer concentration, platform dependency, regulation, supply chain, etc.). The risk section exists for a reason.
Green flags:
Clear value prop in one sentence.
Evidence of demand (paying users, waitlist conversion, retention).
Credible roadmap and burn plan.
Specific metrics, not just vibes.
Yellow/red flags:
Vague revenue claims without third-party validation.
Overly complex cap table or unclear security terms.
Goals that hinge on a single, unproven dependency.
“Guaranteed returns” language (no one can promise that).
Pro tip: Write your own 1-paragraph investment memo: “I’m investing because X, Y, Z; I’m aware of risks A, B, C.” If you can’t articulate it, you’re not ready.
2) Understand the long-term nature of startup investing
Unlike public stocks, early-stage investments are illiquid and long-dated. You’re not flipping shares next week.
Time horizon: Think in years, not months. A common mental model is 5–10 years for any possibility of liquidity. Some outcomes take longer, and many startups fail.
Milestones: Progress is chunky—product launches, partnerships, major customers—rather than the daily ticker of public markets.
Expectations: Returns, if any, often come from rare events (acquisition, secondary sale, or an IPO). Spread your risk; don’t put all your capital into one company.
Set your personal rules:
Only invest what you can afford to lose.
Consider small checks across several companies you understand.
Review your portfolio once or twice a year—over-watching can lead to emotional decisions.
3) Know how equity (and other securities) are issued
In equity crowdfunding, you may receive different types of securities. Common ones include:
Common Stock: Straight equity similar to founders’ stock (usually with fewer rights than preferred shares).
Preferred Stock: Equity with certain economic preferences (e.g., liquidation preference).
SAFE (Simple Agreement for Future Equity): Converts to equity in a future priced round, typically with a valuation cap and/or discount.
Convertible Note: A debt instrument that converts into equity later, often with interest and a maturity date.
Crowd SPV / Nominee Structure: Many small investors are grouped into a single line on the company’s cap table (administratively cleaner).
What to read carefully:
Valuation or valuation cap (for SAFEs/notes): Does it match the stage and traction?
Rights & restrictions: Voting? Information rights? Transfer limitations?
Perks: Sometimes you’ll see investor perks (discounts, swag, feature access) at certain tiers. Nice to have, but not the core of the investment decision.
Conversion mechanics (for SAFEs/notes): When and how does your security convert? What happens if there’s an acquisition before conversion?
Plain-English example (SAFE):
You invest $500 at a $20M valuation cap with a 20% discount. If the next priced round values the company at $30M, your SAFE would convert using the better of the cap ($20M) or the discount off the $30M round.
4) Liquidity and exit strategies: how investors may (or may not) get paid
Startup investments aren’t like gift cards—you can’t always redeem them when you feel like it. Liquidity depends on specific events:
Acquisition: Another company buys the startup—investors may receive cash or stock per their liquidation rights.
IPO/Direct Listing: Shares become publicly tradable (rare, but possible).
Secondary Sales: In some cases, platforms or private markets facilitate secondary transactions. This is not guaranteed and often limited by company policies or regulations.
Dividends: Uncommon in early stages; most profits are reinvested to grow.
Translation: You should assume you’ll hold your investment long-term, and any return will come only if the company reaches a major milestone.
5) Align your expectations with the company’s stage and strategy
Great companies can still fail; mediocre companies can pivot into greatness. What matters is fit between your expectations and what the company is actually doing.
Ask yourself:
Stage-fit: Is the raise size aligned with goals? (e.g., seed for product/market fit, growth capital for scale).
Go-to-market: Do I understand how they’ll acquire and retain customers?
Moat: What keeps competitors from copying them? Tech, brand, network effects, licensing, exclusive supply?
Community: Is there a passionate base of users, creators, or partners? (This is where equity crowdfunding shines—customers can become owners and advocates.)
Expect communication, not daily dashboards: Many issuers share updates after the round (quarterly or milestone-based). Read them. The best investors are engaged, patient, and realistic.
Bonus: A quick checklist before you click “Invest”
I understand this is equity crowdfunding, not a product pre-order.
I read the offering page and risk disclosures end-to-end.
I can explain the business model in one sentence.
I know which security I’m buying (Common, Preferred, SAFE, Note) and the valuation/terms.
I’m comfortable with a 5–10 year horizon and illiquidity.
This investment size fits my risk budget.
I’ve diversified across a few companies I genuinely understand.
I’m not investing solely for perks.
I saved the issuer’s update channel (platform follows, email, or investor portal).
Common misconceptions (and the reality)
“If I love the product, the investment will pay off.”
Love is a great starting point, but businesses are built on unit economics and distribution. Verify both.“This works like a stock trade.”
Not really. Early-stage equity is illiquid and high-risk. You’re betting on a team and a market over time.“I’ll be able to sell whenever I want.”
Usually not. Plan to hold until an exit or a secondary opportunity appears (if ever).“Perks guarantee value.”
Perks are icing. The cake is the company’s potential.
How equity crowdfunding differs from “crowdfunded startups” in the casual sense
You might hear “crowdfunded startup” used loosely to mean any community-backed project. To be precise:
Rewards crowdfunding (e.g., pre-ordering a game or buying a limited-edition item) does not give you an ownership stake.
Equity crowdfunding (what we’re discussing here) is regulated and offers a security (equity or a convertible instrument). Your upside is tied to the company’s performance, not just delivery of a product.
Gameflip’s context: We are running an equity crowdfunding raise—inviting our community to consider becoming owners, not just customers. That’s a different relationship than a one-time product pre-order.
A simple, hypothetical scenario
You invest $250 in a company via a SAFE with a $15M valuation cap.
Two years later, the company raises a priced round at $25M pre-money. Your SAFE converts into equity using the cap (better for you than paying the full $25M price).
Five years after that, the company is acquired. Depending on the deal terms and your security’s rights, you receive a cash or stock payout.
Alternatively, the company struggles and returns no capital. This is why position sizing and diversification matter.
Final thoughts
Investing through equity crowdfunding can be meaningful and empowering: you’re not just cheering from the sidelines—you’re backing a team building something you care about. But with that pride comes responsibility. Do your research. Size your bets. Think long-term. And remember that risk is real.
If you’re curious about Gameflip’s raise, review the offering details, disclosures, and risks on our StartEngine campaign page. Decide whether the opportunity, stage, and terms align with your goals.
Friendly disclaimer
This article is for educational purposes only and is not investment, legal, or tax advice. Investing in startups is risky and may result in the loss of your entire investment. Always read the official offering materials and consult a qualified professional if needed.
