Abstract:

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. Understanding the forces that shape the behavior of both buyers in the crowd 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. Buyers on the platform who visit the campaign decide whether or not to invest in it. Each buyer’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 noisy 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 the entrepreneur’s optimal percentage she offers for sale is non monotonic in the ex-ante probability of success. This is in-line with recent empirical findings. We further show that when buyers’ signals are very noisy, the entrepreneur may prefer buyers that have a less accurate signal regarding the true value of the firm over buyers with a more accurate signal.

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