To send money to as an investor to a startup, is it better, for proof of transfer in a possible court case in case of dispute, to write and mail a check or wire directly through banks? If I use the former, is it advisable to notarize the check? All entities above are in the US.

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    Hi, welcome to law.SE! Unfortunately, your question is unclear. What do you mean by "better from legal perspective"? Do you want to have proof of payment? For a possible court case? Why? Please edit your question to make it more specific. – sleske Apr 15 '18 at 20:00
  • @sleske: Thank you for the welcome. You are right that I need to clarify the question. I have edited the question. Please review. Thank you. – Hans Apr 15 '18 at 20:52
  • Yes, looks better, now, thanks. One more thing: Could you clarify what "notarising a check" means? I googled and could not find anything. – sleske Apr 15 '18 at 22:22
  • @sleske: It was a typo. It was meant to be "notarize". Corrected. Thanks. – Hans Apr 15 '18 at 22:31
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    You seem extremely unfamiliar with business transactions, to the point where you seem focused on an issue that isn't at all important, although I address them in my answer. If you are making a big investment, you should be much more worried about other factors and probably need a lawyer and possibly also an investment advisor, to make sure that you aren't harmed by the far more serious risks presented by a significant investment in a business. – ohwilleke Apr 16 '18 at 5:32

Short Answer

Any kind of check, and any wire transfer, provides effectively perfect, irrefutable proof in court that payment was made by you to the person who received it. One method is not meaningfully better than the other for that purpose.

Long Answer

Security Measures Associated With Checks

Checks are never notarized in the United States. Sometimes, someone who is requested that someone write them a check will ask to have a notarized document requesting the funds, or, in the case of a request for a large life insurance payment or securities account pay on death benefit, a private analog to a notarization called a "guaranteed signature".

But, the person who writes the check never does either of these things. A check's validity is determined by whether it is honored when it is deposited. Cashier's checks and money orders do, however, often have security devices similar to those found in currency such as special colored thread, special paper with watermarks, and even holograms to prevent counterfeiting.

Wire Transfers v. Checks

They Are Equal For Purposes Of Legal Proof

A wire transfer, and a check that is deposited by someone, each provide definitive and basically irrefutable proof that is easily to provide in any possible court case that prove that the payment was made by you.

The bank will have an electronic copy of the deposited check in its records for at least seven years showing the image of the front of the check at the time it was deposited and physical stamps on the reverse of the check showing when it was deposited and into whose account.

The bank will also have electronic records demonstrated when the wire transfer was made, in which amount, to which account and with which instructions. These are also kept for at least seven years.

Also while I call this kind of proof "perfect" and "irrefutable" in my short answer, this is really only 99.9999% true. There are one in a million or one in a billion exceptions involving very elaborate frauds in both transactions involving checks and wire transfer transactions that range from hacked bank computer systems to elaborate forgeries to a criminal who impersonates the intended recipient or impersonates a bank officer. These kinds of professional fraudulent schemes are not materially more common in wire transfers than it check transactions, or visa versa. But, I can count on my fingers the number of times that I have seen either of these kinds of fraud in twenty years of practicing law - only once or twice each.

Disadvantages Associated With Personal Checks v. Good Funds

A personal check has the disadvantage to someone receiving it that it is not in "good funds" and can bounce in the person writing the check has insufficient funds in their account. Funds transferred by personal check, for this reason, also aren't immediately available to the person receiving the check unless the amount of money is very small (the main thresholds are $200 or less for same business day access, and $5000 or less for second business day access).

But, these disadvantages (which are disadvantages to the recipient only, not to the person writing the check) to personal checks can be overcome by using a certified check, a cashier's check, or for smaller sums of money, a money order. All of those special kinds of checks are "good funds" which cannot be refused for insufficient funds by the issuing bank or financial institution, and are immediately available to the person receiving it.

When Are Checks v. Wire Transfers Used And Why

As a matter of custom and practice, if you are going to attend the closing on the investment transaction in person or the person receiving the funds has an office physically close to you, it is more common to make the payment in the form of a certified check or cashier's check, which is a faster transaction if the check is hand delivered and can be deposited immediately.

In contrast, a wire transfer must usually be requested in the morning at your bank to arrive at their bank by the afternoon of the same day and often has a slightly higher service fee than a certified check or cashier's check.

If same day hand delivery of the check isn't convenient (or if there is any reason to fear that the person delivering the funds might be robbed or might lose the check en route to its destination), it is more common to wire transfer the funds, to avoid the expense and delay associated with having to deliver a physical check by FedEx or Express mail or some other courier service. The difference in service fees between a certificate check or cashier's check and a wire transfer is usually less than the cost of a FedEx, Express mail, or courier service delivery charge.

Usually, the concern that the check would be stolen or lost en route is only considered so serious that only wire transfers are used, despite other factors that would usually favor a cashier's check or certified check, for transactions of more than about $50 million or more in a single transfer.

The Real Risk

Of course, in the transaction that you contemplate, the risk that the company you are funding will deny that they received your investment funds is negligible. To worry about that is like wondering if you should go to college because if you do, you might get a paper cut when turning in your essays.

Almost all of the risk in a transaction such as this one involve (1) the company losing money despite the legitimate and good faith efforts of all involved, (2) the receiving entity siphoning away money from the entity for expenses like salaries and related party contract payments while claiming that it was merely losing money from bad business luck (since if the money is lost due to bad business luck, an equity investor has no right to sue) or, (3) losing money because the business fails due to an undisclosed serious risk factor (this is called securities fraud), or (4) even more blatantly, siphoning away money with no pretense of a legal basis for doing so and preventing you from discovering their embezzlement until the money is gone using fraudulent information sent to you such as forged bank statements (as was done in more than one fraud case that I have handled for clients).

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    Don't forget the risk that the startup legitimately is unprofitable. I think that happens more often than fraud; starting a business is hard. – D M Apr 16 '18 at 5:45
  • @DM Fair point. Answer revised accordingly. – ohwilleke Apr 16 '18 at 5:45
  • Excellent answer and much more! Accepted and +1 --- I would have put up more points if it is allowed. Thank you, ohwilleke. – Hans Apr 17 '18 at 15:06
  • Can you also address the same issue with online payment systems, say PayPal or Venmo? – Hans Apr 21 '18 at 22:48

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