Equity Crowdfunding

Equity crowdfunding is a method of financing an initiative whereby an entrepreneur sells shares of her firm to the crowd. Equity crowdfunding is becoming increasingly popular and its potential economic impact is significant. We develop a common value crowdfunding game theoretic model, where the entrepreneur sells a percentage of the firm and then shares the future value of it with the crowd. Potential investors’ arrival process is stochastic. In each period, a potential investor is born with some probability, receives a signal on the future value of the firm, observes the current state of investment, and then decides whether to invest in the firm or not. By offering a different share in the firm the entrepreneur leads the crowd to different equilibria. We characterise these equilibria, analyse when the investors’ behaviour exhibits herd behaviour (i.e., investors ignore their own signal and follow the behaviour of previous investors) and find the entrepreneur’s best decision given the firm’s probability of success and other characteristics. Finally we also compare the entrepreneur’s expected profit in the simultaneous game (where buyers do not observe prior investment) and in the sequential game.

Joint with Arieh Gavious and Hana Tzur

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