Friends & Family
Every entrepreneur is faced with a difficult problem: how to obtain initial capital, to even begin setting up the start-up and bring it to the point where full capitalization can be obtained. While some may be able to do this out of their own pockets, most will need some sort of financial infusions, especially at the very start. Most will seek out friends and family who might be able to help; in actual practice, this often the quickest and simplest way to obtain seed money. Friends and relatives may be much more willing to help out than banks, or financial institutions. However, the entrepreneur needs to be aware that there are pitfalls, and failure of the enterprise can strain relationships with friendships and family.
For this reason, if nothing else, loans or seed money transactions involving friends and family need to be finalized on a sound business basis, and they also need to be fully aware of the risks involved. Because most are not venture capitalists, it is essential that their awareness of money being at risk be documented. Non-disclosure agreements should also be required from this type of investor.
If these people are purchasing shares, rather than loaning money, care should be taken to limit the number of actual investors to avoid triggering state or SEC registration requirements.
Finally, a great resource in designing your approach to friends and family, security, and protection of ideas is through other entrepreneurs who have likely dealt with similar problems.