Friends and family money
The same securities law as any round: Rule 506(b), accredited and non-accredited investors, and the paperwork that keeps the cap table clean.
Money from friends and family is still a sale of securities. A SAFE sold to a relative needs an exemption like any other — usually Rule 506(b) — and a relative who is not an accredited investor changes the offering: Rule 506(b) allows at most 35 non-accredited purchasers in any 90 days, each sophisticated enough to judge the investment, and they must receive disclosure the accredited investors need not.
Friends and family
- Good at
- Fast, and on founder-friendly terms
- Can use the same standard SAFE as anyone else
- Watch for
- Non-accredited investors bring disclosure obligations under Rule 506(b)
- Relationships carry the loss if the company fails
- Informal terms ('we'll sort out the shares later') are a cap table problem later
- Best for
- The very first money, from people who would invest in the founder anyway
Wrong
"My uncle sent $25,000; we'll give him some shares at the Series A."
Right
A standard SAFE, an accredited-investor questionnaire, Form D within 15 days of the first sale.
The paperwork is the same whoever the investor is; only the exemption's conditions change.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- SEC
- 17 CFR §230.506(b)(2)(i) (opens in a new tab)Rule 506(b): unlimited accredited investors, at most 35 others, no general solicitationFree to read
- SEC, Private placements — Rule 506(b) (opens in a new tab)The SEC's plain-English page on Rule 506(b), Form D and state notice filingsFree to read
- 17 CFR §230.501(e)(1)(iv) (opens in a new tab)Accredited investors are left out of Rule 506(b)'s count of 35Free to read
The full map is in US GAAP, and where these rules come from.
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Accredited investorA person or entity Regulation D trusts to bear a private offering's risk — among others, an individual with more than $1,000,000 of net worth excluding the primary residence, or more than $200,000 of income ($300,000 joint) in each of the last two years with the same expected; a director or executive officer of the issuer; an entity with more than $5,000,000 of assets
- Rule 506(b)The private placement most startup rounds use: no limit on the amount, unlimited accredited investors and no more than 35 other purchasers in 90 days (each sophisticated, and given disclosure), and no general solicitation