Starting out, most startups and small businesses face a dilemma: rely only on one’s own savings to fund the business or resort to some financial help from others. Family and friends are often the first one to whom we reveal our endeavors, and often, they are the ones that trust and care for you most.
It is no surprise that 38% of startups raise money from their friends and family, with an average amount invested of $23,000.
Although it may seem that such investments come with no strings attached, the reality may be a little trickier. See our DO’s and DON’Ts to make the most out of a generous offer from your dear ones and preserve your integrity and relationships.
Do
1. Be wary of accepting family funding.
The unfortunate truth is that most new businesses fail. Understand that failed business dealings can have an adverse impact on family relationships (family holidays can be very awkward!). If debt repayment is not timely made, this can create opportunities for family conflict. Taking funds from family creates an environment where the lending family member may make unwanted input into the life and business of the borrowing family member. As a result, borrowing can undermine the independence of the borrowing family member and the ability of the borrowing family member to say they “made it on their own”.
2. Make a full disclosure.
Talk openly about the possibility that the business will fail and the loan will not be repaid. Be open about the nature of the business and the risks and rewards associated with it. Provide formal financial statements so that the lender understands the situation.
3. Plan Ahead.
Decide ahead of time what role, if any, the lender will play in the business. Will they be an advisor or otherwise have an input in the business? Will they have a stake in the business? Decide ahead of time what upside, if any, the relative will gain if the business is very successful. Put all agreements in a signed writing.
Don’t
1. Pressure your relatives into giving you money.
2. Take money that family members need to provide basic needs
Do not accept money that family members cannot afford to lose, either. This can include money saved for:
- retirement
- children’s education
Unfortunately, most startups fail, so you do not want to find yourself in a situation where someone you care about lost a significant amount of money they actually needed and did not realize the risks of losing.
3. Take money if it will harm important relationships.
If there is a risk that accepting money will sour the relationships that are important to you (such as the relationship between you and the lender or the lender and someone else), it may be better to decline the offering.
Sometimes taking money my cause jealousy or difficulties with other family members not directly involved with the transaction (such as siblings of the borrower who may be concerned about their inheritance or the wellbeing of a parent lending money). If that is something important to you, it may be worth it to reconsider.
Takeaways
Accepting funding from friends and family can be very helpful as the startup takes off. Hopefully, this article provided you with additional insights for succeeding not only in your business but also in the relationships with your dear ones.
Alternative sources of funding include personal funds of business owner, bank loans, angel investors, business and personal credit cards, bootstrapping (for example, making money consulting to fund the development of a product), and the company’s customers.
Consult with an experienced attorney if you are considering funding, and we will discuss all the possibilities and their legal implications for your business.
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