I'm declining investment offers. Am I doing it wrong?


7

I'm about to launch my web based business, and several friends/relatives offered to invest small amounts of money(5-10k) for a few percentages (1-5%) of my company. It's a side business for me as I'm full-time employed, and I can easily bootstrap it. The website hasn't launched yet, so I have 0 traction. Although I can use the money for various purposes (mostly for marketing), I don't really need it, and it brings more legal complications to the table. These people are not the in the position to mentor me, so the money is the only value.

I'm leaning towards declining their offers. Am I missing something here?

Equity Investment

asked Apr 15 '10 at 17:10
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Boolean
388 points
  • IMHO, declining the offers is the way to go especially if all the value they bring is money and you don't really need it. – Olivier Lalonde 9 years ago
  • I think you are making the right decision. – Tim J 9 years ago

5 Answers


8

Do not give up ownership of your company for a few measly thousand!

Respectfully decline the investments, but do not burn bridges. You may need the funds later.

If you need money in the future, try to obtain it as a loan (amortized, lump sum, balloon, etc.), not as a trade for equity. The only way you should ever give up equity to another entity is if that entity brings business value to the table. This value must help grow the company in a way that you cannot possibly do by yourself.

answered Apr 16 '10 at 13:38
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Clint
695 points

7

Taking money from family is very risky business.

Are you ready to deal with disgruntle relatives for the rest of your life if the business never picks up and you spent the money? If you can bootstrap it -- do it, until you have some idea whether it is going to fly or not. If the family insists and you can't say NO, try to explain to the worst case of scenario. If they still insist, make sure they understand the risks and please do not skip signing legal documents, just because they are related to you. Make it a condition for accepting the money.

answered Apr 15 '10 at 23:43
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Usabilitest
1,698 points

3

It takes guts to decline money since you never know when you might need it. The rule I always use is take the money when it's offered not when you need it because when you need it, it's never there.

On the other hand, your reasoning for not taking it is rational. Investors tend to complicate things and you do have the overhead of managing them. Why dilute your company if you don't need the money. The investment deal will also depend a lot on the structure of your company. If it's an LLC, the paperwork is minimal. If it's a C-Corp then you need to issue stock. If you have no structure, then you need to create one.

I would also think about which one of these investors might also invest more if you need more. Once you have "hooked" an investor, they are more likely to put more money in if they believe in you and your company.

answered Apr 15 '10 at 22:00
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Jarie Bolander
11,421 points

2

If you truly don't need the money now, it does make sense to decline the offers.

As you get further down the road, you may find that you'd welcome additional capital to facilitate growth. In the interim, you're likely to have launched your site and new investors will be betting on something more than some Powerpoint slides. This means that the risk for prospective investors will be lower and you should be able to get better terms then.

Do set up a formal LLC or C corp, make sure you structure things so that you're investors are treated fairly, and make incredibly sure that you have fully disclosed - in simple English - key concepts such as "you could lose your entire investment" and "this investment is not likely to be liquid for a long time".

Good luck!

answered Apr 16 '10 at 03:30
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Warren E. Hart
2,181 points

1

I think it is all about motivation. Whatever makes you motivated is what you should do. As you do not need the business taking the investments from the relatives might leave you less motivated if the business turns sour, instead of keeping it more or less as a hobby on the side of your full-time employment.

I also want to say that if you do not need the money, then do not take it. You can always ask for investments at a later stage.

answered Apr 16 '10 at 05:24
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David
1,567 points

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