3 ms·

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

by mkull 18y ago

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 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).

jon_dahl 18y ago
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.
- fusionman 18y ago
  @#3...$200k income for the past two years AND reasonable expectation this will continue.
- jamiequint 18y ago
  "I don't know of startup attorneys in the Bay Area, but plenty of people here should." You don't necessarily need a 'startup attorney' or even one here in the Bay Area. If you're intending to raise a Series A in the next few months I'd try to get a relationship set up with a 'startup attorney' but otherwise you're just wasting your money. Go to somebody who knows corporate law, get an associate, and don't go with a big name firm. The stuff you want to do at this stage is likely very straightforward. The best option for you at this point will be to do some sort of convertible note with a discount (of maybe 10-20% on your next round) or possibly a fixed cap (which is worse for you but better for the investor). This is good for two reasons; its simple, and it won't mess up your fundraising later on. You certainly should NOT give this investor control over anything (board seats, voting rights, etc.) the investment is far too small for any of that, and it WILL have an effect on your fundraising down the road. I disagree with the previous commenter who says... "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." In reality the investor has no control over your actions, and also, if you find a better opportunity a good investor should be happy for you to jump on that idea. Assuming the idea really is better.
DabAsteroid 18y ago
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.)

by mkull 18y ago

jon_dahl 18y ago

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.

fusionman 18y ago
@#3...$200k income for the past two years AND reasonable expectation this will continue.
jamiequint 18y ago
"I don't know of startup attorneys in the Bay Area, but plenty of people here should." You don't necessarily need a 'startup attorney' or even one here in the Bay Area. If you're intending to raise a Series A in the next few months I'd try to get a relationship set up with a 'startup attorney' but otherwise you're just wasting your money. Go to somebody who knows corporate law, get an associate, and don't go with a big name firm. The stuff you want to do at this stage is likely very straightforward. The best option for you at this point will be to do some sort of convertible note with a discount (of maybe 10-20% on your next round) or possibly a fixed cap (which is worse for you but better for the investor). This is good for two reasons; its simple, and it won't mess up your fundraising later on. You certainly should NOT give this investor control over anything (board seats, voting rights, etc.) the investment is far too small for any of that, and it WILL have an effect on your fundraising down the road. I disagree with the previous commenter who says... "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." In reality the investor has no control over your actions, and also, if you find a better opportunity a good investor should be happy for you to jump on that idea. Assuming the idea really is better.

DabAsteroid 18y ago

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.)