Ask HN: Friends and Family offering large amounts of money, what do i do?
First off, I just applied to YC W2011 and was rejected. During that waiting process I had told only a few close friends and family of my idea.
After being rejected on Tuesday night and filling in my Dad he made an offer to give me $100k for 10% of the company. This morning another close friend of mine made an identical offer (I did not tell my friend about my fathers offer, it was just a complete coincidence).
I have no prior experience in this particular field (online commerce) though I do have one relatively small software exit ($1M) in database technology.
So I am asking, what should I do in a situation like this one?
I guess it is always easier to take someone's money who you do not know. If it was my money I would gladly spend it in pursuit of this idea, however when it comes to close friends and family i just do not want to disappoint anyone or lose their money.
It is a tough position for me and I would really appreciate any helpful advice of those who have been in similar situations.
Thanks in advance for your help!
EDIT: I should probably also point out that I do not come from a wealthy family, however my Dad owns a company which is doing very well now and he certainly has the money for this particular offer, losing it would not hurt him in any significant way.
My friend who is offering is basically a trust fund baby who simply wants a way to become insanely rich. We do NOT share that sentiment, I do what I do because I love it and cannot imagine doing anything else, however when i was in college he used to give me money to go play poker with and I won him thousands of dollars over the course of about 6 months or so and he seems to enjoy that rush he gets from taking the risk? weird I know
51 comments
[ 3.0 ms ] story [ 92.8 ms ] threadIf he is investing in an idea he believes in, then you are doing a favor letting him invest. There are not many good opportunities for people to put their money to work in this economy considering the state of the stock and bond markets and the potential for inflation.
OTOH, if he is investing because you are his son, then I would not take his money. I have heard horror stories of family and money from several close friends, and I know that your relationships are worth more than any investment. When it goes well it can make your relationship better, but if it goes south the downside is huge.
In regards to my Dad, he truly believes in the idea and he is of the opinion that if I take it to the VC's who now own the company that acquired me they will take it and be the ones who make the money.
I believe in my idea whole heartedly and in my mind there is no way it will not work, but I am also very hard on myself and I know if for some reason this venture failed I would feel terrible and probably even morally obligated to pay back the money even though it would be a total loss for me.
Does that make any sense at all?
I would feel terrible if I took money from an outside VC and the company grew to even a $10-20M valuation knowing he could have gotten his money back tenfold but I would not let him.
I refused to ask for any money back then and/or noone offered it (largely because they thought I was crazy i think) soo I have never been in a situation quite like this one where people come out of the woodwork wanting to hand it to me.
It does not exactly help that I am a semi-celebrity in the city I live in (only about 250k people) even the new mayor-elect called me "possibly the smartest young man in the united states" in his acceptance speech the other day lol.
Obviously that is not true, but I think those factors contribute to people wanting to bet on me.
1. Do I need that much money? Maybe you do, but I'd guess that you probably don't need that much yet. Why not accept a smaller amount (for a smaller slice of the company)? In the future, if things work out you could give them an option of investing further.
2. Are you comfortable taking the money and possibly losing it? Odds are that you'll likely fail (sorry, not sure how else to word this) - will it ruin relationships? This isn't an easy question to answer.
If I were in your shoes, I'd probably try to take a small investment from each which will give you the capital to run for 3-6 months. After that, if things are going well (and hopefully they will be) - think bigger.
Disclaimer: I've never taken any investment so feel free to ignore my advice completely.
2. That is what I am struggling with the most, I could take the money from an Angel of a VC with no questions asked because I truly believe in this idea (and in the words of a big name angel investor I met on my last project, I "have too much of an ego to fail" so i am confident it will work and work well, but I guess in the back of your mind you worry about how relationships will be IF it does not pan out like everyone thinks.
Thanks for the comment and the input, it is greatly appreciated.
You have an obligation to look out for the best interests of your friends and family -- i.e., to take care of them -- whereas your only obligation to professional investors is to honor your contracts.
That's a very real risk in startups, no matter how optimistic you may be now, so you don't want to take money from people who don't understand that risk and aren't prepared to face it.
If THEY'RE not fine with it, then it's time to walk away from the deal. They need to understand the risk at the same level you do.
Something else you can consider: if they're somewhat comfortable, but not 100%, why not spread the risk out between your father and your other friend?
The cheapest financing is frequently your own, if you have it.
If that doesn't underline the difficulty of getting into YC, I don't know what does.
But clearly you are competing with the top caliber of people in tech and the reality is I am just another 23 year old college drop out from a private liberal arts college with a big dream.
...and a $1M exit from a previous venture. Which is more than almost anyone in this business can say.
I know my family and friends don't understand odds very well so I refuse to accept money from them and go instead with professional VCs and angels who know how it works.
I know my family and friends don't understand odds very well so I refuse to accept money from them and go instead with professional VCs and angels who know how it works.
However it has become apparent to me that after you have an exit and therefore more money significantly more people want to invest in you. when I was just a kid with a dream and no money noone was offering.
In regards to the second part of that question, in no way is $1M a "ton" of money, I have invested well and bought things that hold value etc. but it certainly is not the number some people seem to think it is.
Also it sounds like YC may have rejected you because you were already well enough on your way. Just doesn't seem to be the kind of people they choose.
1. I do not "need" the money so you are right. 2. Investors often look at whether or not your friends and family have invested in your idea to see the viability of your idea and the confidence those closest to you have in you.
So in that regard I feel that it always makes sense to take money from any investors as a confidence bid if nothing else, In everything I have learned from business thus far I have always been taught that taking on investment is smart in terms of risk aversion as well. Smaller parts of every idea (including the ones that fail) are almost always better than a bigger part of one big idea (that may or may not fail)
Also, to be fair I did not mention on my YC application anything about my exit because I did not feel it was relevant to my current project so i do not think it had anything to do with them accepting/not accepting me.
Although Hipmunk and a few other would probably argue this point, YC has accepted some wildly successful people in the past and I am sure will get even more applying in the time to come.
If they remain cool throughout the ordeal, I reckon it's okay to take their money.
If they freak out, pay them back $50 and consider that the best $50 you ever spent because you possibly saved your relationship with your father/friend.
I reckon that burning money like that will make the possibility of losing it all much more real.
The reason I suggest $50 as opposed to a $5, $10 or $20 note is because it's just large enough to get most people riled up about but not so much to be consequential.
You might want to try a $100 note if you want a higher threshold.
Who knows if this crazy idea will work, but I'm curious what will happen. Consider it an experiment that you can later blog about to get traffic.
If you do decide to take their money, you next need to figure out if they would be good investors or not. Will they want them to have a say in how the business is run (i.e. voting rights)? If so, would you be okay with them participating in some fashion. If not, don't give them voting rights. If that means that they need to be given preferred shares, I would check with a lawyer to see what implications that has for future funding rounds.
Either way it's a good analogy, any friends and family giving you money need to know that they won't see it again for a long time, if ever.
Edit: The poker analogy is already much better.
That being said, I think that at the very least your father can look at it as a better investment than college if you do fail. You'll learn more in 6 months to a year building your own business than 4-5 years of college teaches 99% of people.
Plus, it can be said that Casinos increase the aggregate wealth for society as well. They are a business like any other and as valid as any Zynga, Playdom or Playfish. They are in the business of offline social gaming.
ref: http://www.bothsidesofthetable.com/2010/07/16/whats-really-g...
That being said, there is a lot more created besides money. All this money generates lots of "experience points" and lessons learned.
I agree that more value is being created, but more money being created is questionable.
That being said I think there is more than enough interest from just those Hacker Newsers reading this thread to show that this would definitely be a popular blog post if written.
With that in mind, go for a $100 note instead of $50 if you decide to do this and write about it as that denomination would make for better linkbait as a blog post title.
http://www.law.cornell.edu/uscode/html/uscode18/usc_sec_18_0...
What's the basis for it even being a law? The only thing I can think of is to prevent people from adding extra 0s to notes to make them higher denominations, which quite frankly is an absurd idea today.
Also, note the wording: "with intent to render such bank bill, draft, note, or other evidence of debt unfit to be reissued"
If he did what I suggested above the note would be unfit to be reissued, however it would not necessarily be his intent. His intent is to test his friend/father and the note is a means to that end. On the other hand, to make his point to his friend/father he would have to show them his intent to make the bill unfit to be reissued.
On the other hand in many museums you have machines for pressing and defacing pennies to make them into novelty items.
"On flattening pennies and other coins, the US Mint site has this to say:
Section 331 of Title 18 of the United States code provides criminal penalties for anyone who “fraudulently alters, defaces, mutilates impairs, diminishes, falsifies, scales, or lightens any of the coins coined at the Mints of the United States.” This statute means that you may be violating the law if you change the appearance of the coin and fraudulently represent it to be other than the altered coin that it is. As a matter of policy, the U.S. Mint does not promote coloring, plating or altering U.S. coinage: however, there are no sanctions against such activity absent fraudulent intent."
The important words here are "fraudulent intent," which means that while the US Mint doesn't condone this action, they have no problem with it.
However it is illegal to flatten Canadian coins.
ref: http://boards.straightdope.com/sdmb/archive/index.php/t-1338...
This article here says otherwise, but provides no evidence that anyone has ever been prosecuted: http://www.msnbc.msn.com/id/7148966/
You also can't advertise on the note using rubber stamps. See "Where's George?". The Where's George website was investigated and ceased selling the rubber stamps and no further action was taken: http://en.wikipedia.org/wiki/Where%27s_george http://www.freelawanswer.com/law/1543-law-4.html
Either way, there's plenty of examples of people rendering bills unfit to be reissued with no problems:
http://hypebeast.com/2010/05/scott-campbell-if-you-dont-belo...
http://www.thisblogrules.com/2010/03/defaced-presidents-maki...
Seeing that your father started his own business and now it is doing great, he should have a solid understanding of what he is getting into.
Your friend on the other hand seems to not understand the risk so I would leave him out of it.
1) Validate the idea. This is very easy to do thanks to the new lean startup concept. You want to make sure that YOUR idea, the solution you're providing to a problem is turning heads. Dropbox did a great job at this(here's a clip of Drew's presentation at the lean startup conference: http://en.justin.tv/startuplessonslearned/b/262672510).
2) Make the MVP, launch it, show it to customers/users. If you feel that you're onto something proceed to step 3.
3) Take the money, dont use it unless you really have to. You want to be really ravenous and not do crazy things with it which is really hard when you get 150k+. Perhaps the best thing to do is hire someone once you really need them, I'd probably only spend that money on employees.
Good luck with your venture!
However, taking money from a good friend or family carries with it a risk far greater than losing $100k. It carries with it the risk of losing a friend or family member in the case your startup fails and you lose their money.
This idea is not one to make a good story. In fact, getting a good story out of it is incidental and that can be used in the future to generate pageviews and attention (it meets the criteria for being a "sticky" idea). The objective of this is to create a simple experiment that may possibly give you insight into whether or you may destroy your relationship with your friend or father in the case you fail and lose all $100k.
Again, I don't know if this idea will even work, but it seems like it could provide insight and another piece of information to draw open to make a decision on whether or not to take their money.
I would also venture that after this incident, they would withdraw their offer if they are the type that can't handle losing money. In other words it may serve to help both sides decide. It may help him decide whether he wants to take the money from his friend/father. It may also help his friend or father decide if they are really willing to put $100k in the hands of someone who would burn a $100 bill for any reason.
To be an entrepreneur you need to be a little bit crazy. I think that's why my suggestion got many more upvotes than I anticipated. HN is full of entrepreneurs that are a little bit crazy at the core. Sane people don't make good entrepreneurs. If a startup founder isn't capable of taking a $100 risk like this to test an idea, would he be crazy enough to spend $10,000 on a crazy idea with lots of both risk and reward potential just to get user adoption?
Here's an NY Times article on the subject:
"Just Manic Enough: Seeking Perfect Entrepreneurs"
http://www.nytimes.com/2010/09/19/business/19entre.html