My relative is short on cash but won’t take my investment

Dear Aunty B,

I read with interest last week your response to a reader who was about to run out of cash and had been offered an investment from a family member.

You were pretty blunt in saying she should run a million miles away from the family member, because mixing business and family is a bad idea.

But I’m actually in this exact same position – my nephew needs cash for a business that has real potential. Is there anything I can do to convince him it could work?

Yours,

BT

 

Dear BT,

Sorry, I’m still not sure that investing in your nephew’s business is a great idea for either of you, but if you absolutely must invest – and you’re nephew is willing – then here a few ground rules:

  • Figure out precisely what level of involvement you will have. Do you want to be really hands on or are you prepared to be hands off? (I’d say to make sure it’s the latter.) Then make sure you both agree and are clear with where you stand.
  • Figure out what level of reporting you want. Most shareholders get quarterly reports, so don’t expect anything more.
  • Try and establish agreement around expected returns and how long you will stay invested. One good option might be to invest for a fixed time (say, three years) for a fixed rate of return (say, 10% per annum) so the investment functions more like a loan.
  • Once you’ve agreed on all this, enshrine this agreement in a formal shareholders’ agreement that sets out the rights and obligations of all parties – especially in the case of a dispute.

The last point is the most important. If you want to do this, an agreement that sets everything out means no one will be unsure of their position if things go wrong.

Be careful,

Your Aunty B

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