8 Tips for Raising Money From Family Members : Under30CEO 8 Tips for Raising Money From Family Members : Under30CEO
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8 Tips for Raising Money From Family Members

| July 4, 2013 | 6 Comments

giving-siblings-money.ju.topIf you’ve raised startup capital from family or friends, what is one tip you’d give a fellow entrepreneur to make sure the deal doesn’t affect the relationship?

The following answers are provided by the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.

1. Protect the Relationship

Some entrepreneurs think they don’t need a contract with a loved one since it’s a close relationship. That is all wrong! The closer the relationship, the more important it becomes to protect the relationship. That’s why it’s important to have a contract when raising money from family and friends, ensuring you both have a clear understanding of the arrangement and exit plan if something goes wrong.
- Rachel Rodgers, Rachel Rodgers Law Office

2. Don’t Do It

Just don’t do it. If your idea has merit, you can find investors who don’t come with the baggage of a personal relationship.
- Robert J. Moore, RJMetrics

3. Rely on Honesty and Transparency

If you’re going to take money from family and friends, make sure that it is money they are willing to lose — and that losing this investment will not have a negative impact on their lives. Make sure that those close to you understand the real risks involved in investing in a startup. It’s your responsibility to make sure the risks are understood before taking any money.
- David Ehrenberg, Early Growth Financial Services

4. Get Agreements in Writing

Outline the specifics of the funding, such as whether any interest will be charged, whether the money needs to be paid back and, if so, within what time frame. Make the written agreement comprehensive, and include all relevant details so both parties know the exact nature of the agreement.
- Andrew Schrage, Money Crashers Personal Finance

5. Define Failure

Here’s a script you can use: “While I believe the opportunity is worth pursuing despite the business risks, the risks are large. Since our relationship is more important to me than your investment, I only want to move forward if we share the following definition of failure: ‘a crisis of integrity or effort.’ The last thing I want is awkwardness between us if the startup does not work out.”
- Kevon Saber, Fig

6. Let a VC Vet Your Idea First

Never ask or allow your family and friends to take on a risk that an experienced venture capitalist won’t take on himself. VCs and angels view businesses on their merits and choose with their heads — not their hearts. If you can earn VC support, then it’s okay to open the doors to allow family and friends to support you monetarily and potentially benefit financially from your eventual growth.
- Manpreet Singh, Seva Call

7. Make Sure They Can Afford It

Your friends and family care about you, possibly to the point where they might risk their well-being to help you reach your goals. Before you even start talking about an investment, you need to know for sure whether your friends and family can afford to help you. If they can’t, don’t even ask.
- Thursday Bram, Hyper Modern Consulting

8. Underpromise and Over-Deliver

Set extremely clear expectations. Don’t tell friends or family that you are the next Google or Facebook. Even if it’s possible, it’s unlikely. Convey to them the company vision as well as the risks, but highlight the risks so they understand what they are signing up for. Show them the long-term potential of your idea, and make sure they understand they are not investing in a savings account.
- Ben Rubenstein, Yodle

Image Credit: money.cnn.com

About the Author: theYEC

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

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  • Michael Luchies

    Some good points here on a very tough topic for many of us. I have failed at raising funds from family and I probably deserved to fail. #8, #1 and #7 are great and go hand in hand. The last thing you want is a family member constantly asking how their money is doing (a reason why you may want to consider #2).

  • Daniel DiPiazza

    If I’m raising from family, I make sure to frame it in the context of contribution to a “project” – not necessarily as an investment. This curtails expectations quickly, LOL. Interestingly enough, was able to raise a nice amount for a film project this way, everyone was happy, nobody expectant.

  • http://Under30CEO.com/ Jared O’Toole

    Disagree with “don’t do it”. Raising money from your family & friends is the #1 way most people get started. Most people will never find an angel or VC to care about their idea or have an idea that will give those investors the return they are looking for. Many companies get going with only a few thousand dollars and the support from the people around you.

  • http://Under30CEO.com/ Jared O’Toole

    Great way to do it Dan. It’s always a tough situation but just like any investment or partnership both parties just need to communitcate the goals clearly.

  • http://Under30CEO.com/ Jared O’Toole

    We never raised money from family for Under30CEO but we realize now that we did in may ways. Matt and I both lived at home for about 18 months after college. That’s a lot of free food, rent etc…Family has also pitched in for many other little things in life. None of this was a direct investment in our business but it played a huge role in giving us the chance to get going. So investment can come in many forms.

  • Michael Luchies

    Good point! Hadn’t even thought of that. The non-investment investments are often much more crucial than monetary investments. I like that title for an article (non-investment investments)