Hi, I am assuming that your friend's startup is in the form of a private limited company and not an LLP. Having said that, preliminary, this looks perfectly legal. However, commercial intent of all the parties are required to be determined to facilitate choosing the correct investment instrument (i.e. equity share/ preference share/ debentures and the like). Further, the number of shares bring subscribed and the exact value of investment are required to be determined on the basis of a valuation report. The investment documents may specifically capture appropriate terms to capture the commercial understanding. Please ensure these documents appropriately protect your interests, are legally enforceable and well negotiated.
It is legal to invest in a Company/LLP. However, it is always advisable to discuss the nature of the investment. To secure your investment you should enter into an agreement (which can only be decided as per the nature of the investment). The safest way is to invest in the form of Convertible Debentures.
It’s perfectly legal to invest in a friend’s startup. As friends and family are the first seed investors in most of the startups.
However, to secure your investment you need to consider few important aspects:
1. Nature of Investment- Equity Shareholder/ Lender/Hybrid: Equity & Debt both;
2. Period of the Investment;
3. Your rights as investor
4. Exit Mechanism;
5. Tax Considerations
Also, you need to execute the investment agreement to secure your investment and rights, so that:
a. you should have equivalent rights as to the present angel investors;
b. on the event of further investment by venture capital in future, you shouldn’t be made compulsorily exit from the startup without your consent or not been given equivalent rights as other investors;
c. And after completion of the fixed term, if you intend to exit from the startup, the company should return the investment along with the committed returns.
It would be reasonable to procure a sound legal advise before moving further to secure your investment.
Hope it would provide some guidance for your query.