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

Consider this: Say thanks, but no thanks.<p>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?<p>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.<p>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.<p>Promise them that they will be the first investor when you decide that you need capital, and get back to actually building your product.

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

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: <a href="http://www.ycombinator.com/seriesaa.html" rel="nofollow">http://www.ycombinator.com/seriesaa.html</a>

Are they a high net worth individual?<p>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 <i>are</i> high net worth individuals) can be less legally complicated, and the boiler-plate stuff that YC provides will probably do the trick.

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

You need a corporate lawyer.<p>The family member has to be an "accredited" investor, which means they have at least a million dollars in liquid assets, not including home.<p>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.<p>I do get the impression that caps and discounts do annoy VCs, as well.<p>(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.)<p>Other people are wary about lending to family. I would tread very, very carefully here.

Just 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:<p>1) They took some money from a good friend and worked <i>really</i> 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).<p>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....<p>F&#38;F investments can and do work well, but you have to be extra careful on how you navigate the personal minefields that may result.

I'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 <i>is not</i> as simple as getting the right purchase agreement in place. Not everyone is legally allowed to buy your stock.<p>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:<p><a href="http://www.law.uc.edu/CCL/33ActRls/rule501.html" rel="nofollow">http://www.law.uc.edu/CCL/33ActRls/rule501.html</a>

I think you can take money by giving investor a convertible note.<p>Here is what I found on web regarding Convertible Notes.<p>------------------------------------- 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 Capitalist) makes an investment. ---------------------------------------<p>but off course you should talk to Lawyer before making decision.

As Steve Miller once said "go on take the money and run".<p>I'm assuming you think the money would help fund the business and is needed, or you wouldn't be asking. Maybe to help incorporate, host the project, etc. So why not take it?<p>You said in a comment that they're a professional investor. I'd find a decent attorney that will work on a deferred retainer and do a quick convertible (there's no reason to go equity here) and keep your fees to a minimum.

I can't offer any professional input, but I think you need a very strong warning about working with family. Make sure you lay out the expectations, their responsibility and power, etc. Having an investor adds many layers of trouble by itself, if that investor is family then deeper ties make it hard to interact professionally at times, etc.<p>Treat this 100% professionally from the start. Draw up contracts, stock reports, everything, anything you can.

Lawyer this, lawyer that... For every case that went wrong in the past, I am sure there is at least one that went well!<p>I was in the same situation as you are; what we did was quite simple actually. Together with your investors, agree upon a valuation for your concept (this is basically the hard part; don't try to come up with all kinds of revenue/profits predictions, just come up with a number both you and your investor can live with, dont't over-rationalize it) and give your investor equity for his money. Done!<p>I am sure many of you can come up with thousands of reasons on why a lawyer should be involved; however the simple approach worked fine for us.<p>I am going to go against everybody else here and say: "do it"! I would prefer having friends and/or family involved in my venture over some random smuck any day! There is a downside to everything, but come on! Making it sound like mixing f&#38;f with business is a sure recipe for disaster is cow dung.

<a href="http://www.andrew.cmu.edu/user/fd0n/articles.htm" rel="nofollow">http://www.andrew.cmu.edu/user/fd0n/articles.htm</a> 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.

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.

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.

Educational product? Do you have a demo/pitch? I'm generally very interested in educational software.<p>Of course, I'd be more than happy to tell you all about the education-related product I'm working on...<p>thelevybreaks@gmail.com

since you don't have any legal structure and don't want to waste time and money finagling with lawyers etc, I suggest you borrow the money at a reasonable rate of interest (say 7-8%), and defer interest and repayment (set yourself a generous repayment schedule) beginning on a date, let's say 2 months after launch, for when it converts to equity or repayment begins.<p>This way you have cash in hand now, and details can be worked out as the product matures. If the house burns down you probably ending up owing maybe a $1000-2000 over the initial $25K, totally worth it for the freedom IMHO.

No.<p>Unless you absolutely, positively need it and as a last-resort-tried-everything-else option. I've seen too many of my friends &#38; family ruin their closest relationships by having similar arrangements.

What else can he contribute to your startup in addition to $25K?

Make sure they qualify as accredited investors.<p><a href="http://www.google.com/search?q=accredited+investor+sec+family" rel="nofollow">http://www.google.com/search?q=accredited+investor+sec+famil...</a><p>If you later-on seek funding from VC's, and they find out that you have had <i>any</i> early investors who were not accredited, deals can fall through.