What can I offer friends for investing instead of equity? • Hacker News Board

Post by fredben » Thu, Aug 19, 2010, 7:57 AM UTC

I've set up a company which looks like it will be receiving some angel investment in the next 3-6 months. In the meantime we need to raise a small amount of extra cash (3-5000) to push out a couple of features and keep us ticking over.

Friends and Family have offered to help out and keep asking if they can have a share in the company in exchange. I don't want to do this mainly because I know that having a number of small investors involved can put off larger investors as well as make things more complicated later on. Not to mention it's quite a lot of work just for a small investment. The alternative is obviously a loan but family/friends seem quite opposed to that as they've bad experiences and feel investing would be more fun.

So - does anyone have any ideas of how I could offer a reward system for small investments so that they feel involved and can benefit if we do well but without muddying the waters for future investors?

(To clairfy - I have no problem with giving up equity or rewarding people who have taken a risk on me - I just don't want to risk future 6-figure investment by having a whole load of small shareholders)

Post by momokatte » Thu, Aug 19, 2010, 11:13 AM UTC

Disclaimer: I might be misinformed or just making stuff up about how stock actually works. I write code, not contracts.

If you absolutely must keep them off the books because they're not accredited, perhaps you could be a proxy for that investment. Friends & Family give you the money, you bring it into the company and have proportionally more shares issued to yourself, and you hold those shares on the behalf of Friends & Family.

On the upside, it might make getting that angel investment go smoothly and if things really work out your company could have an IPO -- after which you could outright transfer the shares to Friends & Family for them to hold or cash out. It would also be that "fun" investment they're looking for.

On the downside, if your company got acquired you'd probably pay more income taxes on those extra shares than Friends & Family would if they had been the shareholders instead.