Your Homie Gave You Money and You Told Him He'd Own 10%. Now What?
It usually starts the same way.
You were early. You had an idea and no money and a cousin, a friend, a former colleague — someone who believed in you before anyone else did. They wrote you a check. Maybe $25,000. Maybe $50,000. Maybe just $10,000 that felt like a lifeline at the time.
You told them they'd own a piece. Ten percent. Maybe you said it over dinner. Maybe you put it in a text. Maybe it was a handshake and a promise and the genuine intention to sort it out properly later.
Later never came. You got busy building. The informal investor got excited watching from the sidelines. Nobody signed anything.
Now you have a real investor interested. Or you're raising a proper round. Or an acquirer wants to run due diligence. And someone — your lawyer, your lead investor, your new CFO — asks the question:
"Who else has equity in this company?"
And you remember your homie.
Why this is a problem
Let me be clear about what's actually at stake here, because founders often underestimate it.
The promise may already be legally binding. In many jurisdictions, an oral agreement to convey equity — particularly one supported by consideration (the money your friend gave you) — can be enforceable. The absence of a signed document doesn't automatically mean the absence of a legal obligation. If your friend gave you $25,000 with the understanding they'd receive 10% of the company, a court may well agree they have a claim to 10% of the company. The fact that you never papered it doesn't make the promise disappear.
It's a securities law issue. When you took money in exchange for a promise of equity — even informally, even from a friend — you likely issued a security. Securities issuances are regulated. Most early-stage founders rely on exemptions from securities registration requirements — the accredited investor exemption under Regulation D in the U.S., the accredited investor exemption under NI 45-106 in Canada — and those exemptions have conditions. If you didn't comply with those conditions at the time of the informal investment, you may have issued securities in violation of applicable securities law. That creates exposure for you personally, not just for the company.
It will kill your deal. Not might. Will. Any sophisticated investor running due diligence will find undisclosed equity claims — or will ask questions that surface them. An undisclosed informal investment with an unpapered equity promise is a red flag of the highest order. It suggests either that the founder is hiding something or that the cap table is unreliable. Neither is a story you want to be telling in the middle of a financing round or an acquisition.
It creates governance problems. If your friend has an enforceable claim to 10% of the company, they may have rights that go along with that — information rights, voting rights, rights of first refusal on future share issuances. None of that was documented. None of it was contemplated. And all of it can become a live issue at the worst possible moment.
The scenarios
Not all informal investment situations are the same. The right path forward depends on what actually happened.
Scenario 1: It was really a loan.
Sometimes what felt like an investment was actually a loan — money given with the expectation of repayment, not equity ownership. If your friend gave you money expecting to get it back (plus maybe some interest), and the equity conversation was loose and aspirational rather than a firm agreement, there's a reasonable argument that the obligation is a debt obligation, not an equity obligation.
If this is the situation, the cleanup is relatively straightforward: document it as a loan, agree on repayment terms, pay it back. You may owe some interest for the period it was outstanding. Get a simple loan agreement signed that reflects the actual understanding. Done.
Scenario 2: It was an investment with a genuine equity promise.
This is the hard one. Your friend gave you money specifically because you told them they'd own part of the company. The promise was real. They understood it as an equity investment. You understood it as an equity investment.
In this situation, you have an obligation to honour the promise — or to negotiate a different arrangement that your friend agrees to. Pretending it didn't happen is not an option. Hoping they forget is not a strategy.
Scenario 3: It was somewhere in between.
Most informal investments live in this space. The conversation was casual, the terms were vague, nobody wrote anything down, and now both of you have slightly different memories of what was agreed. Your friend thinks they own 10%. You think you said "something like 10%" in a speculative conversation that you didn't intend as a firm commitment.
This is where good legal counsel earns its fee — figuring out what the actual exposure is, what the realistic claims are, and how to resolve it in a way that's fair and protects the company going forward.
How to clean it up
The cleanup process has four steps. None of them are fun. All of them are better than the alternative.
Step 1: Figure out what you actually have.
Before you can fix it you need to understand what it is. Pull together everything — the original transfer, any messages or emails about equity, any documentation of what was discussed. Talk to a lawyer about what this creates legally in your jurisdiction. Understand your actual exposure before you approach your friend.
The worst thing you can do at this stage is have a conversation with your informal investor without knowing what you're legally obligated to honour. You may inadvertently confirm a larger claim than you actually have, or negotiate against yourself unnecessarily.
Step 2: Have the conversation honestly.
Your friend invested in you because they trusted you. The way you handle this moment will either confirm or destroy that trust. Don't lawyer up in a way that feels adversarial before you've had a direct human conversation. Call them. Explain that you're professionalising the company's structure and you want to make sure they're properly protected and documented.
Most informal investors — especially friends and family — respond well to this conversation when it's handled with honesty and respect. They're not trying to litigate you. They want to be treated fairly.
Step 3: Paper it properly.
Whatever the resolution, it needs to be documented correctly. The options typically include:
Formalise as equity. If your friend is entitled to equity and you're honouring that, issue the shares properly. Depending on the amount and their status, this likely involves a subscription agreement, representations about their accredited investor status, compliance with applicable securities exemptions, and proper cap table documentation. This is not a situation for a handshake upgrade — you're fixing one documentation problem, not creating another.
Convert to a convertible instrument. A SAFE or a convertible note can be a clean way to formalise an informal investment that's going into a raise. Your friend gets a proper instrument that converts at the next qualified financing — typically at a discount to the price paid by new investors as compensation for their early risk. This approach also avoids having to set a valuation for the informal investment at a time when valuation is uncertain.
Negotiate a buyout. If the equity promise was real but the relationship has changed, or if your investor would prefer cash to equity in the current company, a buyout may be the cleanest resolution. Pay them back their principal plus a reasonable return. Get a full release signed. Close the loop.
Document it as a loan with equity kicker. In some situations, a hybrid approach — treating the original investment as a loan with a small equity kicker as a thank-you — is a fair and clean resolution that works for both parties. This works best when the original terms were genuinely ambiguous and both parties are willing to compromise.
Step 4: Get releases signed.
Whatever the resolution, get it properly documented and get a release. A release is a signed agreement in which your informal investor confirms that the arrangement you've agreed to fully resolves their claim — that they have no further equity claims, no further financial claims, and no claims arising from the original informal investment. Without a release, even a papered resolution can leave residual uncertainty.
What to tell your new investors
Once you've cleaned it up, you need to disclose it — or at minimum, be prepared to disclose it if asked.
Here's the truth about disclosure: cleaned-up prior problems are dramatically less concerning to sophisticated investors than problems that surface during due diligence. A founder who says "we had an informal early investment from a friend, we've since formalised it as a SAFE and they have signed documentation — here it is" is telling a story of competence and integrity. A founder who has a claim surface mid-diligence that they didn't disclose is telling a very different story.
Get ahead of it. Clean it up. Disclose it. Move on.
The people behind the problem
I want to say one more thing about this, because it matters and most legal writing ignores it.
The person you made the promise to is a real person who took a real risk on you. They gave you money when nobody else would. They believed in you before you had proof that believing in you was rational.
The legal cleanup is important. The relationship is also important.
Handle this like a person, not just like a founder. Call before you send a lawyer's letter. Explain what's happening and why you need to formalise things. Give them the opportunity to feel like a partner in the solution rather than a problem to be managed.
In my experience, most early investors respond to honest, respectful handling of these situations with generosity. They're not trying to extract money from you. They're trying to know that the person they bet on is the person they thought they were.
Don't give them a reason to doubt it.
The short version:
You have an informal investment with an unpappered equity promise. Here's what to do:
Get legal advice before you have any conversation — understand your actual exposure first
Call your investor directly — honest, human, before it gets formal
Agree on a resolution — formalise equity, convert to SAFE, buy out, or document as loan
Paper it properly — subscription agreement, convertible instrument, or buyout agreement with full release
Disclose to new investors — cleaned up, documented, front-footed
The informal investment problem is fixable. It's significantly more fixable before your Series A than after. And it's significantly more fixable when you handle it with honesty and speed than when you hope it goes away.
It won't go away. Clean it up.
This is one of the most common issues I see in early-stage due diligence. If you have an informal investment situation you need to resolve before your next raise, book a 30-minute call →. I'll tell you exactly what you're dealing with and how to fix it.
— Kristina Kang, Rebel Sage Legal New York · Ontario · rebelsagelegal.com
