My suggestion would be to politely decline the offer. Never do business in the family it always leads to issues in the end and spoils the relationships. When money gets involved things go haywire....so beaware. They might show a lot of confidence and say things like "I do not care even if the money is lost" but this is not what they have in mind. No offences but unfortunately money takes precedence over anything else.
A family member wants to invest $25k into our startup, what do we do now?
21–30 of 51 posts
Re: A family member wants to invest $25k into our startup, what do we do now?
#22I'm going to go against some of the other comments here say go for it.
The dicey part is how much equity they get, do they get paid dividends, do they only get anything back if you sell, etc. I am curious to see what others say as far as options and advice go in that respect.
My startup was in a similar situation (although it was a close friend who was investing, not a family member). Our situation was different, as they were expected to come on as a fulltime member of the team as well, but that never panned out (they couldn't put the time in due to other commitments).
So now it's dicey because the percentage given to them was based on $$$ investment + an expectation of day-to-day involvement (which never happened). So now its hard to quantify what their actual ownership is.
So I would advise to make it very cut and dry, and put it in ink (by a lawyer). An example of the chop-up (in layman's terms) could be they get say 7% of ownership for 25k with no other expectations from them other then a check. They get paid if you get sold / acquired or if someone buys their share otherwise they get nothing (no yearly dividends / bonus or profit sharing etc).
Re: A family member wants to invest $25k into our startup, what do we do now?
#23Earlier quoted context omitted.
we didn't start this business to be consultants, I hate consulting...I did it for 6 years before we started our company, we want to build our product first and foremost. we've spent the last year writing software for other people (again), and I am tired of it.
Okay, so after a year of development, my first question to you would be: where is your product? I've looked through your comments, and I suppose you will take this investment. That's certainly your prerogative. I would say though that you should put all that money into releasing whatever you have now in some way or another. Kill whatever feature isn't done. Try to find an audience of potential customers that will be…
Actually, we've spent the last year as _consultants_, we haven't been able to develop the product yet. We are starting that this month. Also, we are approaching potential schools to sign up for the project up front as well, giving them a deadline release date.
Re: A family member wants to invest $25k into our startup, what do we do now?
#24Earlier quoted context omitted.
Again, they are aware of the fact this is a high risk investment and are prepared to call it a wash. They believe in what we are doing and that its going to be a good product for education. Isn't that what investment is all about?
You seem more interested in convincing people that accepting the money is a good idea. I'd say you're trying to do this because you know it's inherently a bad idea. I didn't spend three years studying psychology to learn nothing. You're blatantly conflicted, if you thought it was a good idea you'd have taken the money anyway. There's no reason you're on an anonymous news site asking advice and when people make commen…
you aren't getting it. we already PLAN to take the money, we want help with HOW to move FORWARD.
I am not conflicted about the process whatsoever, I just wanted help figuring out how to go forward with this investor.
Re: A family member wants to invest $25k into our startup, what do we do now?
#25Educational product? Do you have a demo/pitch? I'm generally very interested in educational software.
Of course, I'd be more than happy to tell you all about the education-related product I'm working on...
thelevybreaks@gmail.com
Re: A family member wants to invest $25k into our startup, what do we do now?
#26Earlier quoted context omitted.
Okay, so after a year of development, my first question to you would be: where is your product? I've looked through your comments, and I suppose you will take this investment. That's certainly your prerogative. I would say though that you should put all that money into releasing whatever you have now in some way or another. Kill whatever feature isn't done. Try to find an audience of potential customers that will be…
Actually, we've spent the last year as _consultants_, we haven't been able to develop the product yet. We are starting that this month. Also, we are approaching potential schools to sign up for the project up front as well, giving them a deadline release date.
Good luck to you. I hope things go well for you. If you didn't like consulting though, just wait until you have to deal with school administration!
Re: A family member wants to invest $25k into our startup, what do we do now?
#27Just 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
CAREFUL.
See: http://www.law.uc.edu/CCL/33ActRls/rule501.html
In the WSGR Stock Purchase Agreement template you've linked to, the investor warrants that they are an "accredited investor", which long story short means they're a millionaire or have roughly a millionaire's typical annual income.
So far as I know, and having been involved in one minor legal spat involving accreditation (a former employer got bought by another private company, and a valuation negotiation pivoted on the fact that the new company couldn't simply issue me stock), you can't simply give someone 25k and "be an angel investor". There's more to it than that.
Re: A family member wants to invest $25k into our startup, what do we do now?
#28I'd love for someone with more legal experience to start chiming in here about the legalities of accepting investment money from random friends and family. I concede that I don't really know what I'm talking about here --- that's why we pay lawyers --- but my understanding is that taking angel money is not as simple as getting the right purchase agreement in place. Not everyone is legally allowed to buy your stock.
Anyone else with actual experience or data on this? The YC boilerplate has a "must be an accredited investor" clause, and here's the SEC rule it references:
Re: A family member wants to invest $25k into our startup, what do we do now?
#29I'm going to go against some of the other comments here say go for it. The dicey part is how much equity they get, do they get paid dividends, do they only get anything back if you sell, etc. I am curious to see what others say as far as options and advice go in that respect. My startup was in a similar situation (although it was a close friend who was investing, not a family member). Our situation was different, as…
I say "Go for it" too. Find a lawyer before promising anything, even if it is a close friend who doesn't mind doing things informally. I don't know of startup attorneys in the Bay Area, but plenty of people here should. (If you don't get any responses, I'd directly email 5-6 YC startups in the area and ask who they use.) Your attorney will probably want to do a few things:
1. Button up your legal structure and organizational documents, if they need work.
2. Prepare a term sheet, subscription agreement, and other paperwork for the investor to sign.
3. Verify that the investor is an accredited investor (which I think means $1M net worth, or $200K salary for the last two years). You can take investment from non-accredited investors, but it is a lot messier, and may not be a good idea.
Money from family and friends is a time-honored way to bootstrap a business. You seem aware of the main risks (good chance of 100% loss, relationships can turn sour).
One more to consider is your independence. When you're working for yourself, you're only accountable to yourself. When you take on an investor, even a minority one, you need to think about your work through his or her eyes. If a better opportunity comes along in 6 weeks, you might not be able to jump on it because you now have a responsibility to your investor.
Re: A family member wants to invest $25k into our startup, what do we do now?
#30Just one thing to add - I know that you have already decided to take the money, but I know of people who were in the same situation. And they had two observations:
1) They took some money from a good friend and worked really hard to pay it back quickly. Their good friend thought that they were paying them back quickly to push them out of having a stake in the business (eg, she thought they were hiding large profits from her).
2) Every time they bought small things (eg, nice clothes for their kids), they wondered if their friend would think they were misusing the investment....
F&F investments can and do work well, but you have to be extra careful on how you navigate the personal minefields that may result.