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I am wondering as to what is the best (easiest) way to raise money from interested friends who are non-accredited.

I feel like I am fortunate enough to have some wealthy enough friends who would like to be more involved in startups but have always had a reason for not doing so. They have said that they are interested in investing in my company, but they don't yet make the accredited investors cut. So what is the easiest way to get an investment from them?

I have heard that a PPM can easily cost ~$10K, so it might not be worth it. Any recommendations?

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4 Answers

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I am not sure where you are looking to incorporate, but this is what I recently arranged where I am.

You referred to knowing several wealthy friends who would be interested. It might be worthwhile getting them to start an entity with the sole purpose of investing in your startup. They can make sure their company's constitution meets the protection requirements they have and then that entity can buy into your startup.

That way you (as the startup) only deal with 1 collective external party which can make life a lot easier when it comes to decision making.

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This sounds interesting. I will look into discussing this with our lawyer, or might end up staying away from Accredited investors. – Vineet Oct 12 '09 at 4:04
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You should definitely get a lawyer to help you with this. Yes, a PPM will cost you $10k+, and it sucks to pay that, but it's worth it because of the protection it gives you when your startup is wildly successful or especially when things fail miserably.

Also see http://www.thestartuplawyer.com/seed-funding/life-is-too-short-to-deal-with-non-accredited-investors for some of the drawbacks about accepting non-accredited investors.

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Thanks for the link. I definitely intend to get a lawyer involved. The challenge really is in figuring out if it is worthwhile to doing it. – Vineet Oct 10 '09 at 17:44
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It's generally something to be avoided. The blue-sky laws are ugly and annoying to deal with. If you can get non-accredited investors interested in investing in your company, you can probably get accredited investors interested too.

In theory, you could take their funds in the form of a loan, but you'd be playing the law fast and loose.

G/L Shawn

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I don't worry about getting accredited investors, but want to give those that know me the first opportunity. I guess I will resign myself to skipping the all-important stage of raising money from friends and family. – Vineet Oct 10 '09 at 17:40
... oh yeah, thanks for your answer! It has definitely made me consider that my sense of loyalty to those that I know for ages might not serve me well here. – Vineet Oct 12 '09 at 4:06
up vote 3 down vote

Vineet: You definitely want to avoid selling securities (e.g., stock, shares in an LLC, etc.) from non-accredited investors if possible - doing so typically involves far more paperwork (e.g., a PPM) and cost. You will generally be required to make far more written disclosures to non-accredited investors. In addition, having non-accredited investors can create extra difficulty if you later become acquired, as there are additional rules triggered in this context.

If you have a couple of friends who want to invest, and you're going to start a new company, you could consider just forming it with them as co-founders. You don't have to be accredited to form a company and contribute capital to it when creating it (e.g., as a member of an LLC). However, you should seek legal counsel before implementing any corporate plan in this regard.

  • Eric

Eric F. Galen, Esq. The G Group, LLP Corporate + IP + Entertainment Law eric@galenlaw.com

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Are the costs ongoing? Or one time (on raising the money)? I had to form the company about 2-years ago while we were bootstrapping (am not a US Citizen currently). – Vineet Oct 10 '09 at 17:41

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