Every founder has an Uncle Bob.
Sometimes Uncle Bob is literally a family member. Other times, “Uncle Bob” is a college friend, an old roommate, a former boss, or a neighbor across the street who’s followed the founder’s journey since the beginning. The common thread among the “Uncle Bob” collective is that they believe in the founder, and they want in. The conversation is warm and easy (it’s Uncle Bob, after all), and you end by shaking hands and verbally agreeing on a number.
No documents. No counsel. Just nothing but good vibes, a handshake, shared excitement, and dreams of riches.
And that handshake is fine, right up until the company starts doing well.
“Wait a minute, Jake. I thought you said Uncle Bob believed in my company and me!?”
He does and did, but that’s often not the whole story.
The hand(shake) that bites
Here is what I have seen happen.
The company grows, attracts investment interest from real players like venture capital funds and institutional investors, and suddenly Uncle Bob’s memories surrounding that handshake change.
They claim they were promised 20%, not the 5% you remember. They have texts to prove it, or so they say. You each remember the conversation differently, and nothing was ever formalized, so it comes down to two different memories along with a handful of wildly ambiguous texts that each of you reads your own way.
Now you have a financially and emotionally heavy dispute with someone who may be a family member, a close friend, or someone in your trusted personal network. You likely have a cap table that does not reflect everyone’s understanding.
And you also have a real investor in diligence who just found out about all of it.
What happens in diligence
What happens next depends on that investor.
Some back out entirely.
Some demand extended diligence and a clean resolution before they will proceed (and the time involved in that kind of diligence can kill a deal).
Some are sharks, and the dispute just handed them leverage to renegotiate your terms from a position of weakness.
None of that is what you wanted when you took Uncle Bob’s check.
Even small checks are real investments
Often, with Uncle Bob-style handshake investments, fixing everything later can cost more than Uncle Bob’s original check. Every investment, regardless of the amount, regardless of the relationship, regardless of the vibes, needs to be documented.
A simple note or a SAFE with the agreed terms in writing. Not an understanding in each of your heads.
And the paperwork isn’t the only piece. Taking money can be a securities offering. Get it wrong, and investors may have the right to ask for their money back.
Before you take Uncle Bob’s check, make sure you can answer these:
How much is he investing?
What percentage does he get for it?
What does he expect from you? Updates, a say in decisions, a board seat?
Is it in writing?
Does this fit a securities exemption? Have you asked counsel?
Counsel doesn’t have to be expensive at this stage, and they can save you much more in the long run by going over the documentation early. A one-hour conversation before you take Uncle Bob’s check costs nothing compared to the dispute it prevents.
Even small investments are real investments. Treat them like it.