The answer to that question is unequivocally yes. Securities laws apply to every issuance of securities regardless of the investor's relation to the entity or its principals. While the level of required disclosure may not rise to what is required when dealing with an outside investor, certain disclosures are still required. Further, the absence of sufficient documentation in a friends/family round will hurt efforts (or at least slow them down) in future equity raises. Finally, an attorney will be able to suggest alternate methods of taking the investment which may be mutually beneficial to the company and investor- advice you would not receive by foregoing the assistance of an attorney.
The answer is clearly YES! A qualified attorney with entrepreneurial experience (with technology background if applicable) is critical to counseling you on the options, protecting the property as it's created and clearly and in writing delineating the rights and obligations of all parties to the new company. Believe me, having an attorney work with you to create the company will save you thousands of dollars in the long run, because there won't be any confusion. Michael Lightfoot, 847-934-0604.
Yes. Financing rounds must anticipate further financial events, and it is important to ensure a proper foundation for growth and IP protection. Friends and family rounds are sometimes less formal, but they nevertheless must meet securities requirements. In many cases, disclosure is all that much more important, as those close to you might form very divergent expectations based on nothing more than their trust in you and can be disproportionately aggrieved based on their emotional disappointment.
Having an attorney may cost money but it shows the public that you are thinking like a business person and are acting professionally. Doing business with family and friends is always a very tricky thing, even if all is well at the get go. The number one problem in business in general is the thought that one is not running their business the 'right' way and the idea that people who gave you money can get it back or can tell you how to run your company; and when it comes to friends and family, that subject will rear its ugly head somewhere down the line. If you consider that and other issues at the get go and write investment agreements that spell out what behavior is okay and what is not, between you and your investors, many problems will be avoided. You might want to have 2-3 classes of investors based on how much money they are investing and how long they want to be in the pool.............i.e. the highest tier who gives the biggest amount gets to have some say in how things are run and those in the lowest tier are just investors with no say.
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Zoe Biel
Klise & Biel, Ltd.
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