A few weeks back the prof asked me to invest in his business. That is a significant amount for us, I do not understand why he is proposing that. I wonder what should we do with this proposal. What can be the reason behind such a request in a polite way?
I do not want to hurt either side, could you advise me on how should I respond?
Just say no thank you. Do it politely. Do not offer any reason for saying no. Don't provide one if he asks. Just say no.
You or we can speculate endlessly about what this might mean and never find out.
Just say no thank you.
Just one more word of caution: it may as well be that the professor has been scammed.
There are many schemes when scammers make victims believe that they have a "profitable" business, and make victims pull others (relatives, friends, random acquaintances) into investing into this "business". And obviously there would be no "business" in fact.
The prof might be deep into such a scam, and scammers (indirectly) telling them that another $80000 will save all their investments and finally generate a huge profit. Which in fact will never happen.
Whenever I hear that somebody asks somebody else to invest into their business, and this request comes in an awkward or inappropriate context, I always think that this may be a scam.
A gross violation of good ethics. Most likely a terrible "investment" as well.
A word of caution. If your professor or someone associated with them finds your post here it is possible there could be negative repercussions for you or your sister.
A few weeks back the prof asked us to invest in his business around ($80,000) for a 5 percent share.
Firstly it needs to be considered if this is attempt to seek a bribe. Is there any hint that this really more along the lines of you "invest" in my "business" or I'll make sure you never finish your studies ? This is the worst possible interpretation and you give no evidence of that, but it's something to consider.
There are a large number of ways a legitimate business can get finance at this level of funding. "Asking" people you have considerable influence over for it is grossly unethical and not one of them.
However to get such funding would require them to let people with expertise in business finance look at his business plan in detail. Students don't generally understand enough business or finance to do a proper objective examination of a business proposal like this, so it's quite clear (to me) that the person you are dealing with has either already failed to get finance through legitimate channels (because it's a bad deal, most likely) or is unwilling or unable to provide a realistic business plan to back up their claims.
In practical terms this person values their business at $1.6 million which makes the need to seek money from his students very odd. At this point ask yourself how many other people have been asked for this money ? Also ask yourself if this "business" has a much lower realistic valuation and $80,000 would represent much more than 5% of it's true value.
There are a lot of red flags here.
That is a significant amount for us, I do not understand why he is proposing that. I wonder what should we do with this proposal. What can be the reason behind such a request in a polite way?
Decline any requests, now or in the future, with a firm but polite "no".
I do not want to hurt either side, could you advise me on how should I respond?
This is somewhat dependent on where this is happening, as different rules and laws apply and different cultural norms apply as well.
I would regard this is extremely unethical (at best) and potentially fraud (at worst, e.g. if it was related to a pyramid scheme).
I would suggest:
$80,000 is above the usual first-time investor's share in an angel fund, and almost as much as the typical non-US startup raises pre-seed (the US has higher valuations than the rest of the world).
People and funds who invest in startups do their due diligence before committing the money. It includes a brief legal check to assess the firm's legitimacy, an economics study done by an investment analyst, a risk assessment, a HR-like look at the founder team and their competences, and expert assessment from people with startup experience.
The complete due diligence process for pre-seed startups costs VC funds about $25,000 (in the US). At this early angel investment stage it still costs a couple thousand. It costs because it takes specialized knowledge to invest in startups.
If you don't have this knowledge, you'll at best be offering what is known as "cheap money" - money given without making sure to get equitable consideration. It's not wrong to do so; some banks are in this business, but they charge interest.
At worst, you or your sister would be essentially gifting the money to the professor, with some hope of maybe making it back. Investment is a business, and here's the business math:
Investing $80k for 5% implies a $1.6 million valuation at no discount, or $2 million at a 20% discount, which the first investor is due. Investors usually expect at least a 10x growth potential for startups, or 3x for low-risk enterprises. So you have to be sure their idea is worth at least $20 million if it's something novel. Even a sure thing like buying items on Alibaba in bulk and retailing them on Amazon would have to be worth $6 million (3x).
People who don't invest professionally, often have very wrong ideas about how it works. For instance, one might think $80k for 5% of a business that will be worth $2M in a year is a 20% win. Not so; businesses fail, so today it's worth much less, and the first investor gets a discount on top of that. If this sounds harsh, that's how VCs survive startup failures and live to invest another day. It took them decades and a few burst bubbles to figure out how to do it.
If the professor is honestly looking for investment, the best course of action is to acquaint them with fair investment practices and accelerators. If you want to invest, you can suggest the idea to any VC fund and see what they think.
If you're new to investing, don't start with this. Leave risky ideas from people without business experience to experienced investors.
P.S. I'm a startup founder, a member of an angel investment fund, and I'm doing postgrad academic research on the economics of startups and startup studios. These synergize. Not quite a drive-by post.
I am not a trusting person, and the idea of someone with as much authority and influence over your sister's life asking for large quantities of money (extremely large quantities of money in the context of a graduate student's life) makes me very very suspicious. This person has so much influence over your life that you should be concerned about the consequences of saying no. That alone seems to me to be a barrier to your evaluating the offer objectively, which in turn adds an element of formal ethics to this situation.
What's needed is some objectivity, which readers here can't really provide.
However, many universities have business incubators meant to help students and faculty transition academic research into commercial enterprises. If this business is being run through such a group (and to be clear, this should be a business incubator that is actually part of the university, not just one in the area) that would be a good sign and you could inquire of them how these sorts of things are handled, if faculty and grad students form business ventures together. (And eventually, how this specific business is being handled.)
If it is not being run through a university business incubator, I would consider that a bad sign, stick to the story of "We don't have that kind of money hanging around, sorry," (you don't owe them any more explanation than that) and potentially look for a new advisor.
We don't know what is behind the advisor's request.
It could be benign, in that he is intending to give you an opportunity to participate in a spin-off from your work. But than the communication was not as clear as it should have been. The power differential between you two should have made him extremely careful to make sure that his intentions were absolutely clear, preferably with an independent person involved. So even if it benign, it is not professional, and that should make you worried when it comes to such sums of money.
It could be bad, an attempt to use his power to extract money from you, or at least a risky investment he would not otherwise get from you.
We don't know, and neither do you. You could collect information to see which is more likely. However, if you don't want to or cannot invest that sum then you just say no. It is good to do that in writing, e.g. an email, so you have some corroboration if things get nasty.
The main possibility is that this offer/request comes not from your professor at all, but from a scammer. So you ask your professor directly "I received a message asking for an $80,000 investment, seemingly from you. I suspect it is some scammer impersonating you, so you might want to warn all your contacts". This is very useful if it is indeed a scam, and sends out a very strong message if this was indeed the professor.
The second possibility is that this is indeed your professor. That would be unethical on a massive scale. And what an earth would make him think that you or your sister have $80,000 to invest in his business? And how could he not see that this is a huge red flag? So make sure that you have 100% evidence of this "offer" in case he gets any bad ideas. However, the "scammer" is indeed the much more likely explanation.
Now if you are afraid to go this route, you tell them instead "This sounds good. Can you send me all the details about your business that I need to make an educated decision? Business plan, cost and sales forecasts, and so on. I'll show them to my friend XYZ who runs a business and doing quite well, and if he agrees, then I may consider investing. And my friend might consider investing as well".
He is asking you as he's weighed up your family's wealth from observing you over the years.
It was really unwise to have allowed a sister to become professionally involved with your own academic supervisor for a lot of reasons, personal as well as professional.
Ideally I'd like to see your junior sibling removed from this academic's influence as soon as possible - any excuse, any story would do for me.
I feel though that you are leaving out a good share of the history between this academic and you. He certainly has enough information on your family to gauge your access to a significant sum of money - far more than any recent graduate could possibly have, college loans or not. And the professor wouldn't even dare raise such a proposition unless he felt that a high level of human trust existed between you all. I am wondering was la petite introduced to him while you were doing your MS or did she approach the professor after hearing a lot of "good things" (well, 'liberal' supervision and humor can attract a young career woman) about him in conversations with you.
You have allowed things to cross the line that should separate the professional and personal. It now involves a younger family member. And a request for significant investment (not a loan, mind) from your family. This should never happen.
The only way to avoid hurt to your own family - and ultimately to this professor as we all know how these 'investments' end up - is to dissociate yourself and la petite from him immediately.
I'm willing to give the professor the benefit of the doubt that he is acting with good intentions. But you should feel comfortable declining this offer, since you don't have the money to risk. That's a pretty compelling reason. It doesn't mean you don't believe in his venture, so shouldn't result in hurt feelings.
If this venture is something highly related to your research, it is not uncommon for a grad student to become a founding shareholder in a spin-off. But in this case you would expect to get your founder's shares for "sweat equity" -- the idea that you will continue to work on the project for the benefit of the company at reduced/zero pay -- rather than by investing cash. Most founders don't have enough cash to start businesses, and have to raise from others. Initially "friends and family" who have money to spare, then angel investors, then venture capitalists.
If the venture isn't related to your research or you don't want to work on this startup, I'd stick with a firm no, based on your lack of available funds.
