Turning Startup Money Down

It is standard issue in my practice to be confronted with strong willed, able bodied, and risk be damned entrepreneurs. As a legal counselor it is my job to make hazards out there look like more than speed bumps to people who are not accustomed to hearing “that can’t be done.” And as an entrepreneur myself, I will say that it is not against the “by any means necessary” startup mantra to sometimes say no to money. For it is better to be savvy than gusty. And a true test of savviness for any startup is the how’s and why’s of its fundraising strategy.

The first stop on the money train for nearly every startup is the friends and family money. Always seems like a safe bet, and sure why not cash in all those years of Thanksgiving Dinner and family get together torture by taking a “donation” from your uncle Mike? The first legal taboo there, is the fact that most of us, including our friends and family, are not part of the “accredited investor” club. Being an accredited investor means that you are likely a member of the top percentiles of earning and net worth in this country (not Bill Gates wealthy by any stretch, since that is at the 99.99999999 percentile, but wealthy).

There is no need to guess the income parameters of the accredited investor definition as they are laid out in Accredited Investor SEC criteria (Rule 501(a) under the Securities Act of 1933) – which are related to a minimum level of yearly income or a minimum NAV (net asset value).

Not keeping the money in the accredited investor circle can have ugly consequences and hoping that Uncle Mike isn’t vindictive or simply panicky is not and option as your last Thanksgiving dinner demonstrated. Unaccredited investors, under certain circumstances can seek a variety of penalties against you and your company should things go bad or bumpy. In some cases, they can actually rescind the investment and demand the money back as if nothing happened…obviously that is a problem if the money has already been spent. So as part of your startup fundraising strategy, you should begin determining who are the accredited investors in the mist, the ones you have some kind of access to. It could be there is a would be angel investor relationship that you can develop.