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In some states there are exemptions that allow for residents to take part in a Rule offering. For instance, in Tennessee, offering up to 15 investors in a 12 month period are exempt. Other states may or may not have similar provisions and it may be possible that you might not be able to accept investments from residents in certain states. The next question that needs to be asked is should you include non-accredited investors in your capital raise as a matters of morals and good business sense.
The law may permit it subject to restrictions , but is it a good idea? In any event, before taking an investment from a friend or family member, ask yourself this: if he or she lost all of the money invested because the business failed after you did your very best to make it succeed, would this cause hard feelings?
Conducting a first capital raise can be an exciting time for any company. It can also be fraught with pitfalls. You should consult an attorney who is familiar with securities laws to help you navigate this exciting but high stakes stage in the growth of your company. In addition, directors and officers of the issuer also qualify. However, if the information that is given is misleading, the offering could violate the anti-fraud provisions.
This article is for general information only. Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund.
Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success.
He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business. Enter your email address below to subscribe to our newsletter.
Subscribe Sign up today to receive ongoing updates from Strictly Business. Private Funds. Footnotes  It is also possible for business entities to qualify as accredited investors if they meet certain net worth or other requirements. For example, an investor pays a dollar per share in their investment.
That means the convertible note holder would only pay. The discount is offered as a benefit to those who made the earliest and likely the riskiest investments. Regardless of the approach, if your friends and family are planning to invest in exchange for equity, it is your responsibility to detail the risks involved. Startups are risky endeavors, and as a founder, you are also at risk of damaging your relationships if your early stage investors are not properly educated—and as the founder, it is likely to fall on your shoulders to provide that candid introductory level investor education.
If there is one key caveat in bringing on investors via early equity shares, it is that the necessity to plan for a cap on equity. Equity can be a key driver for early-stage employees, and certainly for future investments. For this reason, it is important to be very mindful of this fact when bringing on early passive stakeholders.
By doing so, you reduce risks to your personal relationships, since everyone knows and agrees when the money repayment is scheduled. Having a repayment plan also help set you up for milestone loans. These function such that a particular person will invest an initial amount, and if the business hits a specific milestone or exceeds it , the lending party will deposit another pre-determined amount of financing.
This is a common approach for some later stage investors, too. As far as developing term sheets, this enters the highly individualized legal territory where you likely want the counsel of a startup lawyer. Developing term sheets, not just for investors, but also for your staff and cofounders, is a necessary element to future fundraising. Finally, the term sheet will also state the risks involved, for in the event that your investor s do not see any return on their money.
Rather than estimating the maximum amount of funding you can pull in, think strategically and logically instead. Build a four or six-month plan, and determine how much cash it will cost to buy all the needed inventory and assets, plus any financing you need for early-stage employees.
By being very logical with your initial ask, you are in a better position to request additional dollars if the business is still going according to the plan in a few months. Friends and Family investors typically invest in you and your passion more so than they invest in your actual business.
However, that does not mean you should go in with just an idea on the back of a napkin—at a minimum, you need some solid concepts and defined goals. You do not need a well-produced PowerPoint or a big-budget presentation, but being able to communicate clear plans for your first six to twelve months is ideal.
Include how you plan to use the initial funds, what equity options may be available, and of course plainly state the risks. Receiving a gift or a loan is pretty straight forward, and you can ask practically anyone you trust and who has the available funds. When it comes to equity or convertible notes however, you need to put some more thought into it. Like finding the right investors who will add value in larger rounds, you should determine if these friends and family investors have a professional background, and who really understands the risks and benefits associated with financing your idea.
The Small Business Administration has sound advice on this topic. Once you have an idea of who to ask, ease them in. There are too many MLM schemes and slapdash reseller-wantrepreneurs floating around out there today, that everyone has some heightened caution, and so throwing any red flags can stifle your chances early.
Investing is as much about relationship building as it is selling your startup idea on its merits alone. A few ways to ease a potential investor in is by asking them for input on your concept, and then giving them updates on where things are headed. Having already shown you can communicate clearly and demonstrate early traction as well as openness to their advice, your investors will likely see more value in you as an individual founder, and will be more amendable to considering your pre-seed fundraising pitch.
When the time is right, make the pitch. In some cases, your investors will outright ask how they can get involved, which will make the process easier. Regardless of who makes the first move, focus on ownership shares, complementary services or products, future discounts, or other benefits you can offer that can also help move the deal towards the close.
But most importantly, communicate clearly about your vision, how you are going to get there, and what you can measure to show progress at each stage alone the way. Now you just need to put it all in ink, have the funds wired to your business account, and continue to make progress on your business. Document everything. Startups too often put policies and formalities on the backburner, which can result in a much bigger mess later on.
By having your financials and agreements in check, future investments will be significantly smoother. Remember, one of the key elements of a Friends and Family round is that these are people you already have a strong relationship with. This is especially important for those that may have equity shares. See the most recent news from our Grads at FI. Your location preferences. Cancel Save. For starters, consider the valuation of your company.
Typically, these investors are individuals willing to invest anywhere between $10, and $, of their own personal finances because they feel loyalty and. A Friends and Family round typically results in anywhere from $10, to $, in funding that allows a startup to get through its first. Keep it Professional. You should try to be as professional as possible and treat communication and documentation of things as you would with a real investor.