D.C.-based crowdfunding platform EquityEats is turning away from its founding mission to allow anyone to become an equity investor in a restaurant. The company is now encouraging investors in its pop-up hub Prequel to convert their equity investments into food and drink credits.
Those who choose to cash out will get double their initial investment in food and drink credits toward Prequel's rotating restaurants and house bar. So if they put in $100 and choose to divest, they get $200 in credit. If Prequel is profitable enough to make distributions that would exceed that amount, they'll continue to earn profits in the form of additional credit.
EquityEats changed to a credit-only model for new crowdfunding campaigns last September. But it wasn't until recent weeks that the company looked to reverse course on the existing investments into Prequel. Prequel raised more than $200,000 from 343 equity investors, and 137 have opted to convert their equity to credit so far.
"What we originally were trying to do was let people invest small dollar amounts in restaurants," EquityEats founder Johann Moonesinghe says. "And I think the structure that we picked, which is adding people as a member of the LLC, is not a good structure. I wouldn't recommend that to anyone to do that."
Moonesinghe says the model was ultimately too much work for both restaurants and investors. Many of the small-dollar investors in Prequel didn't want to deal with the complications in their taxes from the required K-1 form. Because Prequel wasn't able to send out the form until April, investors who typically file their personal income taxes early couldn't do so or would have to refile.
Although converting from equity to credit is optional for investors, Moonesinghe sent out an email to stakeholders last week saying, "I think that everyone who invested should opt out."
When EquityEats first launched, it was limited exclusively to accredited investors (individuals who make at $200,000 a year or have a net worth of at least $1 million). Then with the launch of Prequel early last year, the company began to take advantage of new D.C. regulations that allow businesses to crowdfund money from people of all income levels. They've since given up on that.
Still, Moonesinghe insists these changes don't make EquityEats just another Kickstarter or Indiegogo. He points out that people who contribute to campaigns still get returns based on the performance of the restaurant—only now it's in the form of food and drink credits. He adds that EquityEats' new model will not have "perks" like free appetizers or T-shirts.
Beyond the investment changes, the next big shakeup for Prequel could be its home at 918 F St. NW. The business' sublease from LivingSocial, which helps subsidize the rent, ends on Jan. 31, 2017. In an email to investors, Moonesinghe says they're attempting to renegotiate the lease with the landlord, Douglas Development. If they're unable to come to an agreement, Prequel will close at the end of the lease. Moonesinghe says they are looking at other spaces as well.
Meanwhile, EquityEats is expanding its campaigns much slower than it initially projected. Last September, Moonesinghe told Y&H that EquityEats planned to have more than 100 restaurants crowdfunding through its platform by the end of the year. It never reached anywhere near that number. Right now, only one D.C. spot—Calabash Tea & Tonic—is featured on the platform, along with restaurants in California, Colorado, and Illinois.
"We kind of took a pause, I would say, to figure out the best way to structure the investments," Moonesinghe says. "We've launched campaigns slowly on purpose... We want to make sure the approach is right."
If you're still confused, take a look at this Q&A that Moonesinghe emailed to investors last week:
A: Yes. We're profitable and busy because you are an awesome investor. I couldn't get a table last Saturday at Honeysuckle because every table was reserved for the night – that's awesome. Brick and Mortar is really busy to the point where we are hiring more staff. The private event business is picking up as groups realize that we are the premier events space in DC. This week was our best week yet for private events – $40K.
Q:How do I get cash?A: Stay on the LLC (option 1 or 2)Q:When do the credits expire?A: Never. As long as Prequel is around, you can use them for anything at Prequel.Q: When is the K1 coming?A: Soon, but the IRS deadline Sept 15.Q: Why are you offering this?A: We've learned through Prequel that restaurant investors are fantastic. We've also learned that adding people to an LLC is a burden for the investors and for the restaurant. In future, EquityEats will still support restaurant investments that pay back cash and/or credit, but it will be through a different kind of security. It'll be cash payments that are tied to sales revenue, not membership in the LLC. At lower investment amounts, it'll always be a return in the form of credit.Q: What's the biggest risk to Prequel right now?A: Our lease. LivingSocial's sublease with us ends on Jan 31, 2017. They subsidize our rent with Douglas Development (owner of the building). We will attempt to re-negotiate the lease with Douglas, but if we can't get terms that make sense, Prequel will close at the end of the lease. We are looking at other spaces as well, but this is the biggest risk.Q: What option should I pick?A: If you would enjoy getting 200% of your investment in credit, then go with that since it's guaranteed and simplifies your taxes. If you won't spend the credit at the restaurant, then stay on the LLC and wait for your cash distributions. In almost all cases it makes sense to convert your perks to credit – you'll get more free stuff that way.
Q: What do I get for reading this far down?A: A drink on me. Remember to tip your bartender.
Photo courtesy Douglas Development