Most definitely… already working on Part 2

Also, as a general rule of thumb I would strongly discourage you from taking initial investment money from a close relative. If you do chose to do so, make absolutely, 100% certain that both of your roles in the company are well defined before any money changes hands. The potential for bickering and control issues are so strong it’s probably best to politely decline.

Sometimes the biggest risks aren’t financial.

There are a *lot* of ways to handle treat your brother-in-laws investment. (Let’s call him Charlie.) At the highest level, the first thing you’ll need to determine is if the money should be treated as a debt liability or equity.

If you’ll be obligated to pay it back every month plus interest (like a car loan), then you would consider it debt, and the business will likely benefit from being able to deduct the interest on its taxes!

If Charlie (or a developer) is looking for something more along the lines of, say, 2% of the company–which is an extremely common situation in self-funded startups–this would be considered equity and you are not responsible for paying any such interest, dividend or coupon payment etc. This is still complicated, however, because Charlie’s exit strategy is not clear, and you will have to make decisions on dilutability, vesting, transferability, Charlie’s management rights and responsibilites (if any), how the company tax liability will be distributed every year etc. and have a formal operating agreement to take care of all these details. The details will also vary by company type and will likely require the guidance of a attorney and financial advisor.

Great article!

That’s another great idea. Acquisition of both new clients and capital is another one of those large scary topics as a new entrepreneur.

I agree. The “2 weeks” part is really just to communicate that you don’t yet have the money to which you are entitled.

We mitigate the risks associated with these issues in a couple simple ways…

* Requiring a 100% refundable security deposit up front to detract the fly-by-night dirtbags. (Yeah, we’ve been bitten before.)
* Clearly stating the terms of payment and sticking to them. A website-issued check takes but a couple minutes of client time. A wire of about is about same with a slight bank fee. If it’s a larger company and truly a time-to-process issue on the client side, fine, but small/medium businesses generally move faster, so “Umm… I’ll send it tomorrow.” is not an acceptable response from a delinquent client. There’s just too much risk.

Only thing I’d nitpick about is expecting payment to “clear within 2 weeks.” That is remarkably quick in my experience (a month is more reasonable). If it’s an international check it can take even longer (even once it’s in your bank it can take a month for your bank to clear it with the vendor’s bank — i got bit by this once — at which point your bank promptly undoes the deposit).

I only mention this as it has a direct affect on the cash flow issues you mention later.