As a budding entrepreneur, it took a lot of hard work and diligence, but you finally have your business idea in place and things are starting to make sense. As visions of success circle your mind, there’s likely one haunting fear that lingers: how the hell are you going to get enough money to finance all of this? It’s usually not an easy question to answer, but it’s still critical that we find an answer if we ever want to turn aspirations into achievements.
One of the first places that entrepreneurs look for funding is from family and friends. Sometimes an entrepreneur can be lucky enough to have their family and friends approach them even before they ask for funding for themselves! But while the sentiment should be appreciated, a savvy entrepreneur will consider raising funds from these two groups of people with great caution. And while many people take a hard line on raising funds from family and friends, doing so isn’t always necessary. Yes, these types of business transactions can have horrible consequences if they go sour, but if done wisely and with enough thought, great things can happen. And while the range of things to consider when entering into such an agreement is vast and almost infinite, I’ve boiled it down to three important considerations to ponder when thinking about starting a business with the help of family or friends. To emphasize, these are not the only considerations that need to be made, nor can they be absolutely the most important of any consideration; my goal is simply to provide some food for thought.
1. Will the investment dramatically damage or unbalance the lifestyle of your family member or friend if the deal goes bad?
Consider how financially stable the prospective investor currently is. For example, if her friend is living with unpaid student loans or other debt, she may not be the best candidate for a round of financing. Even if she is enthusiastic and willing to contribute cash, the risk that this transaction will work out if her business fails is simply too high. However, this is not to say that she cannot still provide other types of capital. Although financial investments are out of the picture, personal capital from work or social capital from contacts may still be desirable!
2. What level of control, if any, does your family member or friend want?
Some people will contribute money to your cause simply because they want to help you achieve your dreams, and not give a second thought to having a role in the business in addition to financial backing. On the other hand, other people will expect some role or control in the company. The level of control can range from having free products and services for life, or a paid position in upper management levels. When researching your wishes, be sure to recognize that giving the person some level of control may not always be a bad thing. If you are qualified and bring talent or experience to the position, it is worth considering.
3. What is the payment for your family member or friend? Will it be financial gain or just goodwill?
Aside from control in deals, a second big motivator for investors is bottom line or “exit strategy,” and family and friends are no exception. Ask the interested investor what his expectations are for the future. Would you like to see his double inversion? Or would you just like your money back after a certain number of years? Either way, planning for the future by assessing the expectations made today can be critical to reducing stress in the future.
