A family member wants to invest $25k into our startup, what do we do now?

#1

Post by perezd » Wed, Sep 24, 2008, 5:53 PM UTC

We are a small 3 person startup, and have been working on a product designed for education. We presented a demo and the future concept to our family member who was interested in investing in our product and has agreed to invest $25,000 (USD).

Exciting! but, we aren't really sure where to go from here. I know that we need to speak to a lawyer at this point, but what kind? If anyone has a good recommendation for a lawyer in the bay area, forward me their info please.

Also, what about terms of the agreement? ie: equity agreements, shares, etc. Should these questions be answered by a lawyer?

The funding aspect of running a business is new to me and I want to make sure we aren't screwing anyone and that we are doing the right thing.

any pointers?

Thanks!

Re: A family member wants to invest $25k into our startup, what do we do now?

#2

Post by vaksel » Wed, Sep 24, 2008, 6:04 PM UTC

Think long and hard about doing this. There is a reason they tell you not to mix business with family.

Re: A family member wants to invest $25k into our startup, what do we do now?

#3

Post by arockwell » Wed, Sep 24, 2008, 6:05 PM UTC

Just in case you hadn't seen them before YC offers some boilerplate legal documents for angel funding that might help get you started. You can find them at: http://www.ycombinator.com/seriesaa.html

Re: A family member wants to invest $25k into our startup, what do we do now?

#4

Post by Harkins » Wed, Sep 24, 2008, 6:06 PM UTC

http://www.andrew.cmu.edu/user/fd0n/articles.htm has a lot of nice articles on different ways folks can invest in private companies. Give them a read to understand the basics and then talk to a lawyer to write up the paperwork for the course you choose.

Re: A family member wants to invest $25k into our startup, what do we do now?

#5

Post by perezd » Wed, Sep 24, 2008, 6:08 PM UTC

vaksel wrote: post #2

Think long and hard about doing this. There is a reason they tell you not to mix business with family.

Understandable, this is not a direct blood family transaction. They are actually a close friend of the family, and honestly the same fear should apply, of course.

They are in a position to provide us with a decent sum of angel funding, and they also are fully aware of the risk involved. Actually, they are quite excited about the risk.

Re: A family member wants to invest $25k into our startup, what do we do now?

#6

Post by run4yourlives » Wed, Sep 24, 2008, 6:09 PM UTC

Consider this: Say thanks, but no thanks.

1. You didn't ask for the money, it is falling into your lap. Therefore you don't need this money. Why not wait until you need it?

2. If what you build is great and is a success, that $25K will still be there, and you'll have a better idea of what to use it for.

3. If you fail miserably (You don't even have a product to sell yet), the loss of $25K will strain the family. Without it, this problem doesn't exist, and you move on, possibly with $25K to use for something else.

Promise them that they will be the first investor when you decide that you need capital, and get back to actually building your product.

Re: A family member wants to invest $25k into our startup, what do we do now?

#7

Post by run4yourlives » Wed, Sep 24, 2008, 6:17 PM UTC

perezd wrote: post #5

vaksel wrote: post #2

Think long and hard about doing this. There is a reason they tell you not to mix business with family.

Understandable, this is not a direct blood family transaction. They are actually a close friend of the family, and honestly the same fear should apply, of course. They are in a position to provide us with a decent sum of angel funding, and they also are fully aware of the risk involved. Actually, they are quite excited about the risk.

Actually, they are quite excited about the risk.

Everyone always is, because they're only focusing on the upside and not on the fact that once they give you $25K, it's already lost.

Re: A family member wants to invest $25k into our startup, what do we do now?

#8

Post by perezd » Wed, Sep 24, 2008, 6:17 PM UTC

run4yourlives wrote: post #6

Consider this: Say thanks, but no thanks. 1. You didn't ask for the money, it is falling into your lap. Therefore you don't need this money. Why not wait until you need it? 2. If what you build is great and is a success, that $25K will still be there, and you'll have a better idea of what to use it for. 3. If you fail miserably (You don't even have a product to sell yet), the loss of $25K will strain the family. With…

we did actually ask to meet and present it with him. We are interested in the funding and will need it shortly or we will become under capitalized in the next few months.

We have been doing consulting work primarily to stay in business at this point, but we need to cut it off or else we can't dedicated enough time to our project.

in regard to #3, this relative is an investor by trade. He has invested 150K this year in oil and natural gas, he is completely aware of the risk and is embracing it.

I definitely understand the strain that could still put, but I am not his first family investment, either.

Re: A family member wants to invest $25k into our startup, what do we do now?

#9

Post by DabAsteroid » Wed, Sep 24, 2008, 6:24 PM UTC

Make sure they qualify as accredited investors.

http://www.google.com/search?q=accredited+investor+sec+famil...

If you later-on seek funding from VC's, and they find out that you have had any early investors who were not accredited, deals can fall through.

Re: A family member wants to invest $25k into our startup, what do we do now?

#10

Post by run4yourlives » Wed, Sep 24, 2008, 6:27 PM UTC

perezd wrote: post #8

run4yourlives wrote: post #6

Consider this: Say thanks, but no thanks. 1. You didn't ask for the money, it is falling into your lap. Therefore you don't need this money. Why not wait until you need it? 2. If what you build is great and is a success, that $25K will still be there, and you'll have a better idea of what to use it for. 3. If you fail miserably (You don't even have a product to sell yet), the loss of $25K will strain the family. With…

we did actually ask to meet and present it with him. We are interested in the funding and will need it shortly or we will become under capitalized in the next few months. We have been doing consulting work primarily to stay in business at this point, but we need to cut it off or else we can't dedicated enough time to our project. in regard to #3, this relative is an investor by trade. He has invested 150K this year i…

Okay, that clarifies things a little.

I'm a big believer that if you need someone else's money just to get something off the ground, it doesn't mean enough to you. I think people are too quick to give away all their work.

You've got a consulting income, which you admit you could increase if you take focus off your project. Is it a bad thing to do this if it means you remain self funded?

How long does $25K buy you? 3-4 months? What could you do in 1 month? Could you release? Why/Why not?

The lack a money is a wonderfully powerful constraint in proving your idea. It's better to force you product to confront the realties of the market it is in (i.e., is it going to float or will it sink) as fast as possible. Taking capital can sometimes delude you into believing answers to this question that aren't necessarily the correct ones. It gives you an inflated sense of positivity.

Good luck to you, either way!