Ask HN: Should we raise money from people who aren't accredited investors?

#1

Post by ncash » Wed, Apr 06, 2011, 9:10 PM UTC

We are raising capital ($150k-250k) and have had some offers from various contacts. However, I know that many of them are not accredited investors. Should we completely drop these possible funds? Or is there a certain way to deal with unaccredited investors?

We've never raised money before, so we have no idea what pitfalls there are with unaccredited investors who are investing relatively small amounts ($10k-$25k).

Thanks in advance for all tips, suggestions, and investment tales.

Re: Ask HN: Should we raise money from people who aren't accredited investors?

#2

Post by staunch » Wed, Apr 06, 2011, 9:43 PM UTC

IANAL. Try to avoid it. If you really want to do it anyway make sure your lawyer is really familiar with the proper procedures.

There's more potential that a non-accredited investor will try to cause trouble or be a pain in the ass later. Make sure it's someone you know well and can trust.

Re: Ask HN: Should we raise money from people who aren't accredited investors?

#3

Post by mryall » Wed, Apr 06, 2011, 10:03 PM UTC

You definitely want to have a proper shareholder agreement and make sure any amateur investors understand the terms of it before going ahead.

Some potential problems: investors not understanding what kind of shares they have (probably non-voting) and expecting a say in where the company goes, investors expecting to be able to pull their money out or sell the shares when they feel like it, investors expecting dividends from your company when you want to retain all the profits. It's mostly about expectations, which can be managed if you're prepared up front.

Re: Ask HN: Should we raise money from people who aren't accredited investors?

#4

Post by bdclimber14 » Wed, Apr 06, 2011, 11:46 PM UTC

I have a friend who raised a small amount from an unaccredited investor. The investor was a trusted family friend. The startup went nowhere, and the investor lost all her money. She was irate and demanded all her money back. No matter how much explanation you give of the risk, some unaccredited investors will still not understand.

Re: Ask HN: Should we raise money from people who aren't accredited investors?

#5

Post by kovar » Wed, Apr 06, 2011, 11:51 PM UTC

bdclimber14 wrote: post #4

I have a friend who raised a small amount from an unaccredited investor. The investor was a trusted family friend. The startup went nowhere, and the investor lost all her money. She was irate and demanded all her money back. No matter how much explanation you give of the risk, some unaccredited investors will still not understand.

I refuse to a) accept money from family or friends and b) insist on extensive documentation and contracts. 'a' reduces the emotional complexities and 'b' gives me a leg to stand on should there be differences of opinion.

Re: Ask HN: Should we raise money from people who aren't accredited investors?

#6

Post by bdclimber14 » Wed, Apr 06, 2011, 11:54 PM UTC

kovar wrote: post #5

bdclimber14 wrote: post #4

I have a friend who raised a small amount from an unaccredited investor. The investor was a trusted family friend. The startup went nowhere, and the investor lost all her money. She was irate and demanded all her money back. No matter how much explanation you give of the risk, some unaccredited investors will still not understand.

I refuse to a) accept money from family or friends and b) insist on extensive documentation and contracts. 'a' reduces the emotional complexities and 'b' gives me a leg to stand on should there be differences of opinion.

B should always be done. Close family can be a good way to raise money. Generally, they see it as a gift with a potential upside. It's the friends of friends or friends of family where it gets really sticky.

Re: Ask HN: Should we raise money from people who aren't accredited investors?

#7

Post by code » Thu, Apr 07, 2011, 6:38 AM UTC

My general rule of thumb, don't do it. Not worth the potential problems. Instead, get a basic letter of intent from them showing proof a few of them are willing to invest and approach others who are accredited to invest.