

Ask HN: Friends and Family offering large amounts of money, what do i do? - zbruhnke

Ok so i know to some this will probably seem like a dumb question at first, but let me give you a little background:<p>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.<p>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).<p>I have no prior experience in this particular field (online commerce) though I do have one relatively small software exit ($1M) in database technology.<p>So I am asking, what should I do in a situation like this one?<p>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.<p>It is a tough position for me and I would really appreciate any helpful advice of those who have been in similar situations.<p>Thanks in advance for your help!<p>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.<p>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
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malandrew
Tell them to give you a $50 note. Take a lighter out of your pocket and burn
that money in front of them and see how they react. Then tell them that you
are not going to pay them back. See how they react.

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.

~~~
malandrew
Alternatively, you can ask them if they would be okay giving you $100k to go
to Vegas and bet on craps or roulette.

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.

~~~
olalonde
I don't think it's a fair analogy. The expected value of a startup is higher
than the expected value of a night of gambling in Las Vegas (otherwise, VCs
would be at the roulette table right now). It would be pretty hard to prove my
point mathematically, but most people will agree that the aggregate wealth
generated by startups. including those who fail (negative wealth), is greater
than 0, which is not the case with gambling.

Edit: The poker analogy is already much better.

~~~
malandrew
Excellent point, but I'm not sure either his friend or father are interested
in investing so they can increase the aggregate wealth of society.

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.

~~~
olalonde
I think you misunderstood me or, more likely, my argument wasn't clear. What I
really meant was that the "money" generated by startups > "money" invested in
startups. Which implies that on _average_ a startup makes more money than it
loses (expected value is positive). This is opposed to gambling against the
casino where on average, you lose money.

~~~
malandrew
I think the venture capital industry would disagree with you as they have lost
money in aggregate. I'm almost certain that if you take the last 10 years of
NVCA data you will said that VCs on average lose money.

ref: [http://www.bothsidesofthetable.com/2010/07/16/whats-
really-g...](http://www.bothsidesofthetable.com/2010/07/16/whats-really-going-
on-in-the-vc-industry-whats-it-mean-for-startups/)

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.

------
mrduncan
I think there are a couple of things you should ask yourself:

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.

~~~
zbruhnke
1\. I probably do not currently, but this is a situation where I could run
into needing that amount very quickly depending on server traffic etc. I could
take a smaller amount from each, strangely that is something I had not thought
of/

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.

------
philwelch
"I just applied to YC W2011 and was rejected"..."I do have one relatively
small software exit ($1M) in database technology."

If that doesn't underline the difficulty of getting into YC, I don't know what
does.

~~~
zbruhnke
lol my thoughts exactly ... I really wanted YC for the contacts and
opportunities, so I was a bit bummed about that. i would have gladly given the
percentage of the company and done the program for free simply for the chance
to meet the types of people I would have been able to through YC.

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.

~~~
philwelch
_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.

~~~
zbruhnke
I see your point here, but I guess for me I see that more as a formality than
anything. While obviously someone found value in what I built I was lucky to
an extent. It was a "right place,right time" situation and that is a very
humbling thing to remember in this industry. I truly believe that for every
good idea that makes it in tech probably 5 or 6 do not.

------
swombat
Only ever take money from people if you are willing to face the possibility
that some day you'll tell them, to their face, that it's all gone.

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.

~~~
gacba
Let's say you've gone through that step, step 2 which is just as important,
assuming that you're fine with the consequences, is making sure your
"investors" are also fine with that particular scenario. Explain that you'll
do everything in your power to prevent it, but the fact remains the
possibility will always exist.

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?

------
zoomzoom
Sounds like you aren't that confident if you think you are going to lose it!
Really though, the main consideration is this: can your dad afford to take the
hit - and is he investing because he wants to help you or because he really
believes in the idea?

If 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.

~~~
zbruhnke
Thanks for the comment.

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?

~~~
gommm
So the other question, is how would you or they feel if you didn't take the
money, took money from another inverstor and became successful? Would they
feel bad that you refused their money when offered in good faith?

~~~
zbruhnke
That is exactly what my other reservation is ... my Dad especially would be
too proud to invest after success at anything below the current valuation of
the company (which could obviously be very high at that point) because he
would feel like someone was giving him something and he is a man who works
hard for everything he has made and simply does not believe in handouts.

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.

------
jimboyoungblood
Why don't you apply to some other accelerators and/or try to raise money from
angels? YC's not the only game in town.

------
kreedskulls
If it wouldn't hurt your father then accept his money and leave the friend out
of it. As a father you want your children to be successful and if you failed
he would be there to pick you up.

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.

~~~
ahi
I was going to recommend the opposite since the friend has already bankrolled
his poker games. The friend seems comfortable with risk. Father, though an
entrepreneur, might not have the same risk profile.

~~~
kreedskulls
I could see that but a friend has no bond and a few k in good poker winnings
might not get the same result as 100k of losses.

------
hajrice
Here's my take on this situation and what I'd do.

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!

------
alizaki
Close your eyes and imagine that you took a sum of money from friends and
family, gave it your best shot and burnt through it. Would you be able to face
them positively after? Would it undermine your relationship with them in any
way? If it would, then it's not worth it. If your idea is any good, there will
be a lot of opportunity for investments in this market.

~~~
zbruhnke
I did tell both when they asked that if they owned 10% of nothing when it was
all said and done they would get exactly that amount ... Nothing, neither
seemed to see that as an issue or a possibility, I guess maybe that was part
of the problem. I want them to realize it could really happen!

~~~
davi
If you can't make your friends and family realize there's a good chance
they'll lose all their money by investing in you, and the amount of money
they'd be investing is a nontrivial fraction of their assets, you can't
ethically take their money.

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.

------
jkent
Could you use some of the $1M exit to self-invest and avoid diluting your
stock at this stage?

The cheapest financing is frequently your own, if you have it.

~~~
zbruhnke
I will indeed, in fact I was planning on boot strapping anyhow, however I know
that the amount I have and consider free for investment (about$250k) will not
be enough to get me through the entire project, and the people offering are
not doing so because I need the money or they do, they are doing so because
they believe in me and my idea. Which is what makes it so much more pressure
filled

------
xutopia
I'd tell my father that chances are that you succeed are one in 20 and that
unless he sees that money as investment in his son's education he probably
will feel like it was a waste.

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.

~~~
notahacker
The "education" angle is a good one, particularly if it's $100k your dad would
quite happily have spent putting you through college without any possibility
of a direct financial return.

------
jrbbl
You should always think clearly and separate business form family, being said
that, get into a very cold thinking process and define how much of an added
value F&F could bring to your biz case, once, I was meeting with Chris Sacca,
and I had a big financial player willing to invest $5M into esarly tech
ventures, and Chris spoke upfront and said to me, money is not really the
issue, the issue is WHO is putting the money in. You need really smart capital
and financial partners that will generate the right noise for your project to
get from 0 to 60 in the shortest time, F&F first do not know anything about
the industry, and second may not be critical enough to tell you when you are
doing something wrong, and even if they do tell you, you may end up saying,
WHO ARE THEY TO TELL ME WHAT I SHOULD DO!! Hope this helps

------
petervandijck
Take the friends' money (it sounds like he could afford loosing it). Don't
take your dads money (too much stress).

~~~
vchien
I second you. My mom offered and I said NO....

------
qq66
Don't do it. The stress of starting a company with your time and strangers'
money is enough.

------
TheSOB88
So... what happened to that $1m exit? Have you already used it all on your new
company? Why are people trying to give you money if you already have a ton?

~~~
zbruhnke
lol thats kind of a funny question, I still have a large majority of the money
from my exit both in liquid and in assets.

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.

~~~
TheSOB88
Well, it's certainly more than you've been offered. So do you really need the
money you've been offered? Especially since you'd be giving up part of the
company for it? I really doubt it.

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.

~~~
zbruhnke
well I see the "need" question two ways, so I'll answer in both of them.

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.

