11 Things Not to do When Trying to Raise Capital From Family or Friends : Under30CEO 11 Things Not to do When Trying to Raise Capital From Family or Friends : Under30CEO
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11 Things Not to do When Trying to Raise Capital From Family or Friends

| May 16, 2012 | 3 Comments

 

Q. What’s one thing NOT do when trying to raise capital from family or friends for your startup?

The following answers are provided by the Young Entrepreneur Council (YEC), an invite-only nonprofit organization comprised of the world’s most promising young entrepreneurs. The YEC promotes entrepreneurship as a solution to unemployment and underemployment and provides entrepreneurs with access to tools, mentorship, and resources that support each stage of their business’s development and growth.

A. Don’t Rely on Memory Alone

Do not do business with friends or family — or anyone, actually — without a legally binding agreement. Interpretations differ, memories degrade, and if you’re relying on a handshake alone, then your relationship and business can suffer. It’s easier to envision contracts as a clarifying document to protect each person rather than some evil necessity.

Kelly Azevedo, She’s Got Systems

A. Don’t Assume They Know Everything

Devesh DwivediDo not assume that they know what you know, or even how business investments works. Explain all terms, risks, conditions, alternatives, and exit strategies in a basic and understandable format, so that a future failure or success does not jeopardize your relationship. Put everything in writing and involve a third party as a witness of the understanding.

Devesh Dwivedi, Breaking The 9 To 5 Jail

A. Don’t Think It’ll Be Easy

doreen-blochWhile your friends and family are much more likely to support your startup efforts, never be blasé about raising funds from this group. Give friends and family investors the same thoughtfulness, preparedness and consideration as you would a professional investor. And, like with Venture Capital or other traditional investors, make sure you have enough lead time with your deliberations.

Doreen Bloch, Poshly Inc.

A. Don’t Make Grandiose Claims

Lisa Nicole BellUnlike investors, your friends and family are people who will continue to be in your life whether your business succeeds or fails. Avoid making outrageous and inflated claims. Be conservative and allow your work to speak for itself.

Lisa Nicole Bell, Inspired Life Media Group

A. Don’t Oversell

nathan lustigSimplify your pitch down to a single page, then speak in very plain language. Tell them that they could lose all of their investment. That it’s a risky investment. Even though you think you will succeed, they need to know that most startups fail. Be honest and you’ll still be able to go to Thanksgiving dinner without shame.

Nathan Lustig, Entrustet

A. Don’t Take Money They Can’t Afford to Give

Your friends and family care for you and will be willing to take bigger risks with their money as a result. But don’t let them give you too much — even if you just need a little more money to finish development, that doesn’t excuse things like letting someone tap a college fund or a retirement account. I don’t care if you are certain you’ll be able to replace it in no time — don’t do it!

Thursday Bram, Hyper Modern Consulting

A. Don’t Beat Around The Bush

Be very straightforward about why you need the money, what you will use it for, and how they will get it back. If you aren’t realistic with them upfront then you are setting yourself up for a nightmare. Have a plan and strategy going into the discussion.

John Hall, Digital Talent Agents

A. Don’t Think They Can Automatically Comprehend

Usually, family and friends are not investors so the deal has to be very easy to understand and to explain, otherwise they could feel ripped off. Use the same valuations and rules for all of them — again, they’re not professional investors. You could do a different deal with two experienced angels, but not with your friends and family — they may not understand it.

Christian Springub, Jimdo

A. Don’t Accept Investments Essential to Their Retirement

Of course your startup is a “sure thing,” but circumstances beyond your control can come into play without notice. Clearly communicate the risks associated with your company and only accept discretionary capital from all private investors — especially friends and family.

Evan Kirkpatrick, Wendell Charles Financial

A. Don’t Give Passive Investors Control

Although you want to take care of your family, you don’t want your families opinions to hurt your business. If raising money from family is a must — though I don’t recommend it — then you want to at least make sure that the family members do not get a vote or say in the direction of the business. If they want control, do not take them on as an investor.

Lucas Sommer, Audimated

A. Don’t Wait Any Longer!

louis lautmanDo not wait for the perfect moment to ask people for capital for your startup. You may be surprised at how much support you have from your friends and family, once you ask for it. Even if they say “no,” you have started the process of getting them to think about helping you, and sometimes you need to plant that seed before it grows. Let them see your commitment, and they may change their mind.

Louis Lautman, Young Entrepreneur Society


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Category: Funding, Startup Advice

  • anon3127

    Great article. All good things to consider. Biggest take away, do not raise from family and friends who are money sensitive or who do not understand the risks involved in startups. Sometimes this mean keeping your minimum investment amount high. 

    You should also be very clear about the instrument you are using to get money from friends and family. A really popular instrument these days is the Convertible Note. It can actually take a while to explain to someone what a convertible note is and how it works when people have never heard of a convertible note. One thing I found was to use examples of the different scenarios that you can go through and how that affects their valuation.
    Found a good template for a convertible note when you are raising from multiple family and friends (http://alpha.upcounsel.com/Public/Document/4fad949ece77a70924ad80b9). It contemplates using a discount but not a valuation cap, but I believe is pretty standard for a family and friends round.

  • anon3127

    Great article. All good things to consider. Biggest take away, do not raise from family and friends who are money sensitive or who do not understand the risks involved in startups. Sometimes this mean keeping your minimum investment amount high. 

    You should also be very clear about the instrument you are using to get money from friends and family. A really popular instrument these days is the Convertible Note. It can actually take a while to explain to someone what a convertible note is and how it works when people have never heard of a convertible note. One thing I found was to use examples of the different scenarios that you can go through and how that affects their valuation.
    Found a good template for a convertible note when you are raising from multiple family and friends (http://alpha.upcounsel.com/Public/Document/4fad949ece77a70924ad80b9). It contemplates using a discount but not a valuation cap, but I believe is pretty standard for a family and friends round.

  • anon3127

    Great article. All good things to consider. Biggest take away, do not raise from family and friends who are money sensitive or who do not understand the risks involved in startups. Sometimes this mean keeping your minimum investment amount high. 

    You should also be very clear about the instrument you are using to get money from friends and family. A really popular instrument these days is the Convertible Note. It can actually take a while to explain to someone what a convertible note is and how it works when people have never heard of a convertible note. One thing I found was to use examples of the different scenarios that you can go through and how that affects their valuation.
    Found a good template for a convertible note when you are raising from multiple family and friends (http://alpha.upcounsel.com/Public/Document/4fad949ece77a70924ad80b9). It contemplates using a discount but not a valuation cap, but I believe is pretty standard for a family and friends round.