Confirming anticipated participation of investors in my first project

[Maciej_G]

Hello,

I'm starting my own business. Following the "3f rule" (family, friends & fools), I decided to look for funding among my family members and friends. I want to ask them for confirmation of participation in my first project. The terms would be that the "friend" confirms that he/she will invest X amount in my project if and only if I find 100% of the required sum to initiate the project. The reason for such action is that I want to 1. validate the market and 2. address other relevant stakeholders and convince them by showing how much investment I can get.

I'm looking for a way to express that anticipated participation so that it looks professional and trustworthy for the other stakeholders yet doesn't discourage my friends from participation. It should be safe for them ("I will not give him any money unless he really starts the project") and for me (I will be able to assume these people will indeed participate in the project when the time comes).

Any suggestions are welcome!

 

[Taxing Matters]

Any suggestions are welcome!

Unfortunately what you are asking about is not as simple as you might like it to be. The details of exactly who you ask to invest, how much you are seeking to invest, how you will structure the investment and what kind of return they'll get all matter. You need to know that federal and state securities laws may apply to your investments. For example, generally speaking most investment offerings are the offer of a security under federal securities laws. The general rule for the offering of a security is that the security must first be registered with the Securities and Exchange Commission (SEC). Registration is a very expensive and time consuming process. However, for small investment offerings that meet certain criteria there are exemptions from registration. However, to take advantage of these exemptions you may still need to file a form with the SEC. You may have to meet some requirements under your state's law, too.

Apart from that, there are two other major areas to concern yourself with. First, you want to ensure that the way you do the investment offer won't put you at risk later for expensive legal proceedings or expose you to unnecessary risk of claims by the investors. So you have to be careful what you promise the investors, need to be transparent with how things will work, and be honest with the investors about both the potential upside to the deal and the risks involved in it. And, of course, you need to be sure you handle the investor's money appropriately to further the business and not to line your own pocket.

Next, like pretty much anything that involves money, how you do this will have a tax impact. Some investment arrangements are more tax advantageous than others. You don't want to unwittingly end up in a structure that will cost you more in tax than some other arrangement that otherwise would have worked just as well to fund your business.

As a result, when starting a new business where you will be looking to get others to invest in it, it is really good idea to consult a securities lawyer or a business lawyer familiar with the securities laws as well as a tax lawyer for advice on how to set it up. While that will cost you some money in fees, the money you save over the life of the business by doing it right versus what it could cost you if you screw it up will make it worthwhile.

 

[Just Blue]

Hello,

I'm starting my own business. Following the "3f rule" (family, friends & fools), I decided to look for funding among my family members and friends. I want to ask them for confirmation of participation in my first project. The terms would be that the "friend" confirms that he/she will invest X amount in my project if and only if I find 100% of the required sum to initiate the project. The reason for such action is that I want to 1. validate the market and 2. address other relevant stakeholders and convince them by showing how much investment I can get.

I'm looking for a way to express that anticipated participation so that it looks professional and trustworthy for the other stakeholders yet doesn't discourage my friends from participation. It should be safe for them ("I will not give him any money unless he really starts the project") and for me (I will be able to assume these people will indeed participate in the project when the time comes).

Any suggestions are welcome!

What state?

 

[adjusterjack]

Are you in the US? The reason I ask is that "stakeholder" is not a term that is normally use in the US. If you are in the US, what state? State laws differ and there are federal laws to consider when it comes to investments.

Nobody here is allowed to give specific legal advice on how to draw up documents. You'll have to hire a lawyer for that who can also tell you what else you'll need.

Is this money you are looking for an outright gift, a loan that you intend to pay back, or an investment where the investor risks losing all his money if the business fails?

I can tell you one thing, though, if you don't get the money now, when somebody commits to it, your chances are slim for getting it later.

Example:

Jack - Sounds like a great business opportunity. I'm in. When do you expect to start.
Maciej_G - As soon as all my funding is in which I expect to have by June 1.
Jack - Great, come see me on June 1 and I'll put up $1000.

June 1:

Jack - Sorry, old pal, I can't come up with that money anymore (uncertain economy, virus, job loss, new baby, new car, new house, kids' college, unforeseen medical, not so sure about your idea anymore, etc, etc, etc).

You'll get many more like that and your business idea collapses like a house of cards.

 

[quincy]

What you need is a business law attorney and a tax attorney in your area. You should sit down with these lawyers to discuss the specifics of your new business and how best to structure it to meet your wants and needs. You will then need help in drafting the legal documents that will govern your business and your business relationships.

All of that goes way beyond the scope of any internet forum.