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.