One question that we’ve gotten fairly frequently is whether or not an entrepreneur should take money from unaccredited investors. It’s tempting – you have friends and family that want to help you out, in many cases don’t want debt and want a piece of the action.
Brad and I aren’t your lawyers. If you take money from unaccredited folks, consult one – this can get tricky sometimes. If you decide to take money from these types of investors, consider some of the risks and balance against the rewards of getting funded a bit more easily.
1. You are normally limited to 35 unaccredited investors. After that number is surpassed, you are committing securities violations;
2. If anything isn’t done “just right” in the offering (in other words, make sure you lawyer is on board), unaccredited investors will normally have rescission rights to rescind their investment as if it never happened;
3. Unaccredited investors are normally less risk tolerant and if things with your company don’t go as you planned, it would not be surprising to for you to have more problems managing your shareholder base than you would with accredited investors; and
4. If you sell your company in a stock deal, it’s likely that the acquirer will not want to take on your unaccredited investors as shareholders. You will need to find cash to cash them out, normally.
Again, this is a complicated area of securities law and this blog does not focus on the legal intricacies. Plenty of startups take money from unaccredited folks, just know what you are getting into before you do.