Entrepreneurs

Most Americans are not aware that new businesses are not started by banks, venture capital firms or the Small Business Administration (SBA). In fact, most small business ventures are founded by an entrepreneur and funded by that person and their friends and family. In fact, the SBA estimates that 87% of new businesses are started this way!

When you solicit your friends and family to help you start the next Google or Hewlett Packard, you may find that they don’t have a lot of disposable income lying around un-invested. One way to deal with that reality, while helping them save for their retirement, is to suggest that they invest with you through their retirement account. If they agree, all you need is a self-directed custodian to work with, then submit the necessary documentation to that custodian for its review and acceptance and you’ll be off and running.

Why do retirement accounts make sense as a source of capital? First, most people have some sort of retirement savings account. Provided your investor’s account is not a pension plan from a company that still employs them (in most cases such pension funds won’t permit investments in non-public investments such as a corporate startup, nor do they permit early withdrawals), they may be able to help you by investing.

For the investor, private equity (although quite risky), can be equally rewarding if successful. As a result of the degree of risk, however, they should not risk all of their retirement savings. But if you and they are successful, the gains will occur in a tax-deferred or tax-free account, and will therefore, be able to grow faster thereafter.

Of course, there are important rules that need to be understood so that you don’t create a prohibited transaction by self-dealing. If you or your direct family members will be investors, then you will have to have other non-relative investors as well if you or any of your direct family members want to work in the firm and be paid for doing so. If you will just be hiring others that are not related to you to run the company, the self-dealing issues will for the most part be obviated.