Accounting For Your First Crowdfunding Campaign

In our experience with crowdfunding campaigns, we’ve learned a few things you might want to know before you get started.

Plan Your Launch

Kickstarter and Indiegogo are primarily about engaging your current audience to gain exposure to a larger audience. The first few days are critical for momentum, and the campaign is not the time to announce your product to an unexpecting world. You want to have your current and preexisting fans ready and anticipating your launch, lined up to fund your product to give you the best chance of reaching a new larger audience. If you’re not prepared for it, quick success can ruin your company (any company, crowdfunded or not, can lose its character by rapid growth). We trust that the world will want what you provide. We hope you surpass your targets by 10x, 30x, or 100x! And crowdfunded campaigns are a great way to market test and crowdsource new product development. By preparing for success, we lessen the chance that you’ll get derailed.
Do you know your Cost of Goods Sold? This is an accounting term that basically means “sell stuff for more than you paid for it”. If you have a $5 contribution level for a sticker that costs $2, plus $.50 to ship, but are also paying an intern $20 an hour to mail these out, your COGS means you’re barely making anything. Watch your COGS at those higher value levels, especially when the rewards are flashy or require extensive travel or time commitment by executive staff. Those $10,000 pledges are inspiring to behold, but let’s make sure they don’t cost you $15,000 to deliver!

Financial Impact

Money raised is not a loan. There is no obligation to repay. Neither are you giving up equity. Technically, you have no obligation to accomplish your goals except for the potential of damage to your reputation. Don’t be that campaign. Be prepared for the financial unknowns to make good on your commitments and build your brand.
These are not donations. You are not a nonprofit, and running one campaign doesn’t qualify you as one. Becoming a 501(c)3 is a process with a host of compliance demands, and should only be considered within the scope of your wider business goals, not simply to try to save on taxes
You will owe ordinary federal and state taxes on the income you generate. Depending on the timing of the related expenses, you could pay more in taxes than necessary the first year (probably best not to run a campaign at the end of the year). You could also be subject to sales taxes based on your product and the locations of your buyers (so prepare for this at the very least by collecting ZIP codes from your list)
Legal structure impacts your campaign. Depending on the success of your campaign, you will have different tax implications based on the legal structure of your business (Sole proprietor, LLC, Corporation, etc). Changing your business after the fact (based on the condition of success of your campaign) may work, but results in a short window to make that decision. Probably better to prepare for the best case scenario ahead of time, in keeping with your larger business goals.

Expecting Growth

Expect your fulfillment time to exceed your expectations, and stretch out your cash to ensure you survive. It’s not uncommon for campaigns to take 3-6 months longer than planned, and your monthly burn rate could mean eating into your profitability. You might need concurrent campaigns, or other sources of funding. Kickstarter is one stream of income. Be developing multiple streams.
Don’t get carried away with hiring based on a successful campaign. Bringing in a fulfillment company or a customer service representative can quickly wipe out your profit. A budget of projected expenses and delivery times and other concurrent income generating activities can help you determine what is essential. You could even treat hiring as an internal stretch goal (but again, make sure you’re sufficiently profitable!)

Additional resources:

Stonemaier Games shares 127 (and counting) lessons from Kickstarter. They deal with accounting and finances in their 4th lesson. (Link)
Glenn Fleishman (The Magazine) shares his experience with taxes, and an interesting case of late-year Kickstarter and tax timing. (Link)
Wired collected 5 Kickstarter projects that found more success than they planned. Take these repercussions seriously. (Link)
BarrettAccounting For Your First Crowdfunding Campaign