Jonathan Graff, MBA, ICD.DVenture Partner at Celtic House Ventures

Venture Partner at Celtic House Ventures. VC Investor, Board Director, advisor, mentor, husband, proud father of two teenage daughters. Formerly President & Vice Chairman, Kaboose (TSX:KAB, sold to Disney); President, Benecaid; CEO, Enthrive. Passionate about helping early stage companies grow and seeing their business leaders succeed. Love to talk about strategy, leadership, fundraising, managing growth, solving problems, governance, exits, life, and hockey.

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Good luck!

There is no quick answer to the question because there are too many variables that are currently unknown. There are also many structural options to consider that would impact the amount of equity given in any round, including a friends and family. For example, common equity, multiple variations of preferred equity, convertible debt, and SAFE notes ('Simple Agreement for Future Equity') could all result in different equity positions for your investors.

Which of the structures is most appropriate will vary by the attractiveness and opportunity investment to investment, and will also be impacted by external inputs like market conditions.

I have playing leadership roles on teams that have raised over $150 million of capital through numerous channels including angel, venture capital/VC, public reverse takeover, and private placement.

I have also been an angel investor for 10 years and I am currently part of a VC group that has deployed over $500 million in venture capital.

I'm happy to discuss with you for a free session during the COVID-19 crisis and help anyway I can. You can find the code in my expert listings on my clarity profile.

Assuming this is a relatively new venture, your options are friends and family, a corporate partner, or an accelerator / incubator program. In light of the current financial environment affected by COVID-19, they all present challenges. I would be happy to expand on the merits and obstacles of each option, but I would require additional details of exactly where you are at in the development of the app and the business. If you are truly helping people during a difficult time, perhaps you have an opportunity to attract resources.

There are many layers to this situation you are in. I’ll suggest some perspective, but I am somewhat reluctant to provide bankable advice without having more specific information.

The first thing that strikes me is that your business partner is being very transparent with you, so I see that as a real positive in your current business relationship. That said, your concern is a prudent one and you are not overreacting by proceeding with caution and considering the right structure and approach for yourself.

Is it a red flag? Yes and no. On some level it’s not that different than hiring any employee who can become a competitor of yours in the future. You would have to consider and manage this as well. A few initial questions: Is the brother going to work and add value to your business, or are you just training him? Is it clear what’s in it for you? Do you have clarity on the potential business or product segment the brother wants to launch? What in your business is proprietary to you? How can you protect that?

If not already in place, one suggestion would be to safeguard yourself and require a non-compete from both your partner and the brother. In turn, you would provide this to your business partner, so you have to be careful how restrictive you make it. You have to think through how narrow to your product category and/or customer set it should be. I would like to see certain non-solicit provisions in place as well.

I would also consider how you may want to expand your own business into other product categories in the future. Does the brother’s business and the non-competes potentially limit your future plans? If you end up competing head to head, what are your rights to buyout your partner (or vice versa)?

Another potential idea is to think about having a right to an interest in the business venture that your partner and partner’s brother start after he learns from you. This should be considered and negotiated today. It could also speak to your relationship with your current business partner. Are you only going to be partners in the one business, or does it make sense for a broader partnership in similar businesses going forward? It’s the brother today, it could be another business associate or colleague tomorrow.

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