Friends & Family As Sources of Business Funding
As a budding entrepreneur, it took a lot of hard work and diligence, but you finally have your business idea squared away and things are starting to make sense. While visions of success circle throughout your mind, there’s probably one haunting fear that remains: how on earth will you come up with enough money to fund this whole thing? That’s usually not an easy question to answer, but it remains 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 may be so lucky as to have family and friends come to them before they even ask for funding themselves! But while the sentiment should be appreciated, a wise entrepreneur will consider drawing funding from these two groups of people very cautiously. And while many people draw a hard line on fundraising from family and friends, doing so isn’t always necessary. Yes, these sort of business transactions can have horrible consequences if they sour, but if entered into wisely and with enough analysis, it’s possible for great things to happen. And although the range of things to be considered when entering such an agreement is vast and nearly infinite, I’ve distilled the subject down to three important considerations to ponder when you think of starting a business with the help of family or friends. To emphasize, these aren’t the only considerations that need to be made, neither may they be the absolute most important of any consideration – my aim is simply to provide a few pieces of food for thought.
1. Will the investment dramatically hurt or imbalance the lifestyle of your family member or friend if the deal goes wrong?
Consider how financially stable the prospective investor currently is. For example, if your friend is living with unpaid student loans or other debts, 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 results in if your business fails are simply too high. This isn’t to say that she cannot still provide other types of capital, however. Even though financial investments are out of the picture, personal capital of labor or social capital of contacts may still be desirable!
2. What level of control, if any, does your family member or friend desire?
Some people will contribute money to your cause merely because they want to help you achieve your dreams, and without a second thought to having a role in the business aside from financial backing. On the other hand, other people will expect some role or control in the company. The level of control could range anywhere from having free products and services for life, or a paid position in the upper levels of management. When probing for their desires, be sure to recognize that giving some level of control to the individual may not always be a bad thing. If he is qualified and brings talent or experience to the position, it’s worth considering.
3. What is the payout for your family member or friend? Will it be financial gains or simply goodwill?
Aside from control in business, a second big motivator for investors is the result or “exit strategy,” and family members and friends are no exceptions. Ask the interested investor what her expectations are for the future. Would she like to see her investment double? Or would she simply like her money back after a certain number of years? Either way, planning for the future by evaluating the expectations made today can be instrumental in reducing tensions down the road.