My cofounder’s aunt, who knows virtually nothing about startups or raising capital, wants to give my cofounder a $25,000 loan under the table. She doesn’t understand venture capital and doesn’t want to have to fill out the usual paperwork. My cofounder is desperate for the money and wants to take his aunt’s money. I think this is going to cause a lot of problems in the future for a quick fix today. What can I tell him to stop him for accepting this?
It's not bad to take the money, just have him do it individually and then invest the $25K into the company via conv. note, or "loan" the company $25K if it's a justified bridge.
The bigger question is why you need to post this and not just have a conversation with him. As an investor, I'm more concerned for the future of this relationship than I am with your cap table, balance sheet or fundraising strategy. Also, why are you not desperate for the money too? You're a team. If the company needs money, you both should know that.
If she's not a qualified investor, you could get in trouble with the SEC. Furthermore, if you don't have proper documentation (e.g., signed convertible note and note purchase agreement), this could look like TAXABLE revenue or worse, money laundering. Do things by the book.
He can take the loan personally, it's then up to him how he spends it.
Tell him the Board will not approve taking the funds under the table. She should be an accredited investor in order to invest. She should be required to sign the documents. You can find them online. If that does not scare her off, then maybe she should invest.
1) There is no legal problem in taking money from her aunt.
2) $25000 is not much and can be invested by anyone at anytime in any company without being an accredited investor.
3) She does not have to understand the business. You and your partner have to.
4) What VC paperwork are you talking about? Simply take it as a loan in the name of your company and repay.
I agree with Ryan... if capital is invested by one or other parties then it should go on the books to say that director is 'owed' ... it will show as a negative balance on the accounts, then if you make a profit this or the next year could can recover the invested capital rather than paying excess tax. (ask an accountant)
It's not bad to take the money, though, it should be a loan to your co-founder.
They do say that the first / second line of raising capital is from friends and family, one should try to go as far as possible before asking for capital investment from a 3rd party.
Being desperate for money is no way to be though... and this money should not be used for 'wages' of the founders / directors. In truth, founder get no wages, they get dividends... so you can inform your cofounder that the monies invested will be distributed to cover budget requirements for the company... this includes, accountancy, limited budget for hardware / software... etc. etc.
Treat it like a business, respect it like a business and the business will grow and thrive... waste the money = a waste of your time = your time your life. His debt.
Good luck. :)
Taking a loan without paperwork is bad not only for the company and your co-founder but also YOU PERSONALLY. Instead of convincing him, tell him you disapprove. If it is an already formed company, its bylaws should state the rules of raising debt or equity and those must be followed.
By the way, some people mention accredited investors and SEC. I think those apply to equity investments and not loans. Anyone can loan anyone money - it is important to paper the terms of the loan. In no case should you be an unwilling party to the loan personally.
Disclaimer: I am not a lawyer. All i am offering is a friendly advise to fellow entrepreneur.
What a great problem to have! I wouldn't recommend that that "we" (the business I'm assuming) take the loan. Your cofounder can take out a personal loan from his aunt if he chooses and if he wants to invest it in the business, do so with the usual paperwork.
I would tell him that the business is not accepting money in this fashion and if he wants to assume personal liability for a personal loan to invest in the business personally, then that is his choice.... Unless of course this option too is troubling.
Ultimately, I think the bigger issue is not being on the same page with your cofounder about how you want the business to operate and grow. I don't think it would hurt to have a chat about what your visions are for the future.
Also, even if you two don't opt to have him accept the money, it's nice to have options to pass on. Best of luck!
I think you have not explained the real pain here. I guess you are looking at a long term vision by following professional approach rather than getting short term casual liquidity.
This i think is a mature approach for sure and you should try to show your co-founder long term vision that you carry. Best case would be to identify cases which happened within your network who looked for easy money and created problems later.
Although, i would point that this is not the last time that there is a difference in opinion between 2 of you. So it's all about adapting and respecting each others decision and except the outcome together. You can't do it alone, that is why you have a co-founder. So, look at the bigger picture and focus on basics while working together as a founding team.
Feel free to touch base for any specific question.
I agree with Ryan Negri.
Is the best advice
Money..to reject ... I wouldn't do that!
These day is havy to have relatives, friends who help you money wise
You should embrace it. Is an "offer", not an disadvantage!