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:
- Discretely check with other students (you trust) whether they have been approached in this way.
- Ask the professor for a detailed business plan and proposal by email.
- Politely but very firmly decline the "offer". You can stop here if you want.
- Consider approaching the institute's ethical committee or even (if you are so motivated) asking the police or a financial regulation body to investigate.