In order to best protect your company and interests, as well as personal relationships, it’s highly recommended that you obtain legal guidance, which can save you substantial money and hard feelings down the road. There is no one-size-fits-all in these situations, so engaging an attorney is actually an investment in your company. I’m going to try my best to avoid mentioning too many SEC regulations and provide you with some general insight regarding friends and family (“F&F”) rounds and accredited investors. Again, speaking with an attorney for something so important is the move here though.
- As a general rule, it’s best to limit your F&F offering to Accredited Investors only.
- An Accredited Investor is an individual who has (i) a net worth (or joint net worth with his/her spouse) that exceeds $1 million at the time of the purchase (not including the value of the primary residence); or (ii) income exceeding $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000 for those years) and a reasonable expectation of such income level in the current year.Non-Accredited Investors require a larger disclosure of information. If you raise capital from non-accredited investors in a Rule 505/506 registration-exempted financing, you must provide a ton of information about your startup. This additional cost is something to consider if your startup is tight on capital.
- Non-Accredited Investors can cause trouble down the road when you’re trying to be acquired. This is due to Non-Accredited Investors triggering additional rules regarding an acquisition. Sometimes the acquiring entity will require the startup to buyout the non-accredited investors before agreeing to the acquisition.
I invite you to check outfor additional information that can help you make these important decisions about structuring deals for early investments from friends and family. Also please feel free to message me directly if you want an entrepreneurs perspective on raising a seed round from your F&F investors. Hope this helped!