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

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

#31

Post by arockwell »

tptacek wrote: post #27
arockwell wrote: post #3

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

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 an…

Thanks for adding that. I really wish the YC documents came with some explanation or overview of what the terms mean. I really don't understand them very well.

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

#32

Post by DabAsteroid »

mkull wrote: post #22

I'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'm going to go against some of the other comments here say go for it.

Whether or not to got for it was not the question. The question was how to proceed (lawyer recommendations, etc.)

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

#34

Post by tptacek »

arockwell wrote: post #31
tptacek wrote: post #27

Earlier quoted context omitted.

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 an…

Thanks for adding that. I really wish the YC documents came with some explanation or overview of what the terms mean. I really don't understand them very well.

I think these docs are intended as a way to reduce your legal hassles, but are misinterpreted as a way to eliminate lawyers. To take an investment, you need a lawyer.

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

#35

Post by fusionman »

jon_dahl wrote: post #29
mkull wrote: post #22

I'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 organi…

@#3...$200k income for the past two years AND reasonable expectation this will continue.

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

#36

Post by lsc »

I turned down money from my family... but I'd turn down money from anyone who wasn't going to provide me with more than just money. I want a business guy, with relevant contacts, and this family member was a business guy, but he didn't want to advise me on the business side of things.

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

#37

Post by fusionman »

prashantdesale wrote: post #19

I think you can take money by giving investor a convertible note. Here is what I found on web regarding Convertible Notes. ------------------------------------- Convertible note is a debt instrument that can be converted into stock at the option of the holder or the issuer. More specifically, the investor can choose to convert the total amount of the note into equity when an institutional investor (such as a Venture…

Convertible Debt is a popular instrument currently. Make sure you understand it though. What is it convertible to? This typically means that you intend to allow your debt holders to convert their investment to stock offered at the time of accepting Series A (or next round) funding....and they convert it at a discount....and the interest accrued is converted to stock at the same discount. Typically the max time frame for the debt is 1 year (securities issues I believe...has to be registered if longer), so if you don't anticipate taking additional funding in the near future, convertible debt is probably not for you. We could discuss this forever, but thats enough for now.

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

#38

Post by SwellJoe »

Are they a high net worth individual?

If not, there are additional legal issues you have to contend with. Various "protect the little old ladies from being taken for a ride" laws make it more difficult for individuals who aren't worth millions to participate in private investing. At least, that's the case with corporations. With an LLC and proprietorship, I guess it's more like a personal loan and all of the legal stuff that surrounds personal loans would apply. Presumably you plan to, or already incorporated. As you've noted, spending a couple of hours with a lawyer is probably a wise investment. Just a phone call to a startup-focused lawyer will get you a few minutes of free advice on what you need a lawyer for (the better a lawyer is, the more likely they are to try to avoid doing extraneous work for you--they may charge twice as much, but they'll put in significantly less billable hours). Surprisingly, perhaps, raising bigger money from angels (who are high net worth individuals) can be less legally complicated, and the boiler-plate stuff that YC provides will probably do the trick.

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

#40

Post by joshu »

You need a corporate lawyer.

The family member has to be an "accredited" investor, which means they have at least a million dollars in liquid assets, not including home.

You might consider convertible debt here, so that you don't have to set a valuation now. Instead, it converts to stock possibly at some discount to and possibly at some valuation cap from whatever gets negotiated with a VC later. This makes life easier. The cap could be in the 500k - 3m range, depending on how much work you've got done.

I do get the impression that caps and discounts do annoy VCs, as well.

(Personally, I don't like doing converts -- I just want to place the bet. I've done ~ 7 angel investments, including one or two YC companies.)

Other people are wary about lending to family. I would tread very, very carefully here.

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