Raising Start Up Capital – Should You Involve Your Friends and Family?
Starting a business can be quite expensive. Options for financing are often seriously limited. Your personal assets, credit cards, and perhaps retirement fund have all been tapped, and you find that you are still short. Bank financing is notoriously difficult for a new business to obtain. Angel investors generally have pet interests, which your company may or may not meet. Thus, you might turn to your family and friends to cover your needs. Borrowing from relatives may seem to be a fairly safe option. After all, they love you and understand you, and are interested in seeing you succeed. However, this type of arrangement can carry serious risks and pitfalls. What happens with your company can begin to affect your personal relationships with your loved ones.
There are a few things to consider, when you’re accepting money from friends and family. Will their funding buy them some equity in your business or is it a cash loan? Regardless, the people you borrow from will most likely feel like they have a say in your business and will probably give you well-intended advice. Whether you give friends and family some legal rights to have a say in your business affairs or not, those close to you will expect that you take decisions that lean towards the ability to repay their loans. This may make you feel as if you’re under a magnifying glass, so have a good deal of patience and be prepared to deal with the scrutiny.
You must also consider the what-if factor. Some people are hopelessly generous and optimistic about investing, until something happens in their own lives that changes their financial picture. How will you handle it if Aunt Suzie suddenly needs that $10,000 to pay a medical bill, and you are unable to repay her? Be sure that your investors can take the financial loss in the event that the company fails and you are unable to repay the loan.
Open and honest discussion about the money, and the investor’s ability and willingness to permanently part with it, can go a long way toward preventing permanent damage to relationships in the event that the company fails. However, this is not the only consideration. If you choose to sell equity, then you must also have a frank conversation about the company’s future. There have been cases of investors blocking potentially lucrative deals because they were not comfortable with the risk involved. Make sure that your investors are on board with the way you plan to develop the company in the future. A business plan can help in narrowing your focus, and provide your investors with an understanding of your goals. Review it with investors you know just as carefully as you would with a banker.
Remember that your investors are your friends and relatives first. Do not take advantage of their generosity, and be sure that they understand the risks involved. Put any financial agreements in writing, and handle them with the same professionalism that you would any other business transaction. Be sure to consider personality factors, and only accept investors who share a common view of the company and its long term potential. Following these tips can help to ensure that no matter what happens with the company, Christmas dinner will still be a comfortable and friendly occasion.
