In the United States, you have to be an “accredited investor” to invest in early stage start ups. To be an accredited investor, you either have to be wealthy — $1 million in wealth (not counting your house) or have income over $250,000 for 2 consecutive years — or pass some of the tests generally required to be a banker (like the Series 7 exam).
That’s what makes start ups different from a normal small business. If you open a bar or restaurant, you generally get a loan from a bank and are profitable when you open. If you want to raise rounds and lose money for years, only “accredited investors” can invest. Basically, the government bans people who aren’t aware of the risks or able to take the L that often comes from investing in risky start ups. You have to prove you’ll be fine if the company fails (or that you know what you’re getting into).
I feel like I’ve heard about friends and parents chipping in small amounts to startups, is that a recent change or is there a limit on how much you can invest?
Friends and parents certainly can chip in but they usually get bought out for nothing or their shares are diluted to basically nothing when bigger money comes in.
They probably were using “start up” wrong but there’s no police force hunting down people who lied about being non-accredited investors. You just have to sign a standard form that says you’re an accredited investor and it basically just means you can’t sue anyone if you lose your money.
If a company fails, they might still have some value. In the medical company example I used, maybe they fail Phase III safety trials and don’t get approved. So, they sell all their laptops and beakers or whatever. You don’t get to sue anyone for shenanigans1 if you lied about being an accredited investor.
1 Shenanigans is not a legal term but don’t invest in risky start ups with founders you don’t know if you aren’t able to absorb the loss
In the United States, you have to be an “accredited investor” to invest in early stage start ups. To be an accredited investor, you either have to be wealthy — $1 million in wealth (not counting your house) or have income over $250,000 for 2 consecutive years — or pass some of the tests generally required to be a banker (like the Series 7 exam).
That’s what makes start ups different from a normal small business. If you open a bar or restaurant, you generally get a loan from a bank and are profitable when you open. If you want to raise rounds and lose money for years, only “accredited investors” can invest. Basically, the government bans people who aren’t aware of the risks or able to take the L that often comes from investing in risky start ups. You have to prove you’ll be fine if the company fails (or that you know what you’re getting into).
I feel like I’ve heard about friends and parents chipping in small amounts to startups, is that a recent change or is there a limit on how much you can invest?
Friends and parents certainly can chip in but they usually get bought out for nothing or their shares are diluted to basically nothing when bigger money comes in.
They probably were using “start up” wrong but there’s no police force hunting down people who lied about being non-accredited investors. You just have to sign a standard form that says you’re an accredited investor and it basically just means you can’t sue anyone if you lose your money.
If a company fails, they might still have some value. In the medical company example I used, maybe they fail Phase III safety trials and don’t get approved. So, they sell all their laptops and beakers or whatever. You don’t get to sue anyone for shenanigans1 if you lied about being an accredited investor.
1 Shenanigans is not a legal term but don’t invest in risky start ups with founders you don’t know if you aren’t able to absorb the loss