Author Topic: What You Need to Know Before Letting Friends and Family Invest in Your Company  (Read 1332 times)

Afsana Ahmmed

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What You Need to Know Before Letting Friends and Family Invest in Your Company

           "Securing an investment from friends or family to grow your company is tempting, but there are pros and cons to having them involved. Be smart about the decision before taking their money".

I've invested in a few entrepreneurs who have asked me whether they should let their friends and family invest in their company. The truth is - like many things in life - that there is no right or wrong answer, but there may be a right or wrong answer for you personally. So what are some of the pros and cons of taking money from friends and family? Read below so you can make the best decision for yourself.

Pro: no one else may give you the cash.
Sometimes beggars can't be choosers. If you find yourself in a situation with little financing options, and friends and family are the only ones willing or able to support your vision, then you may need to take it. It could be the difference between whether your business exists or not.

Pro: future investors may view this as positive signaling.
When you're first starting your company, you may not have revenues or any kind of track record. You only have you - your drive, your vision, your work ethic. Friends and family who invest in you in the early stages believe in you as an individual. This can be a sign to more sophisticated investors who look to invest at a later stage that those who know you best were willing to commit capital because they trust you with their hard-earned cash.

Pro: your favorite people will likely play supportive roles in your business.

By taking money from friends and family, they are now equity holders in your business. Thus, they are aligned with you financially in wanting you to succeed. You may find it helpful to know that they will not only support you as they normally would, but they may also go the extra mile to make introductions and offer emotional support because they will personally profit if you succeed.

Con: they may be unsophisticated investors.
Your friends and family are not likely professional investors. Although they may mean well, they may not know how to conduct a negotiation fairly. They may not understand the risk of losing their money. They may pepper you with requests for information post-investment which may obstruct the growth of the business. Unsophisticated investors can potentially be a headache to founders, but it can be especially tricky to confront the behavior when it's coming from someone you love.

Con: the lines between your work and family relationships may become blurred.
Guess what? Your business partners are now at your Thanksgiving dinner! You may want to keep your work and family life separate, but that becomes challenging when all your business partners are assembled conveniently around the communal table for holidays. If you prefer down time during family reunions or to avoid answering business questions around the dinner table, you may not want to take their money.

Con: you may not want the stress of letting your loved ones down.
You're putting your heart and soul into your company, not to mention your personal savings! You've examined all the risks for yourself and have decided to go for it at the risk of losing everything. But, are you willing to risk losing your parents' savings also? The stress of losing your relatives' money may be so frightening to you that it actually affects the way you run the business. If you think that the fear of letting your loved ones down and/or losing their money is so strong that it may paralyze your ability to run the business effectively, it may not be worth it to take their cash.

Again, there is no right answer as to whether you should take money from your friends and family to grow your business. You have to think through your personal relationships, the specific people involved, and your own financing options. Friends and family may be the best thing that ever happened to your business, or they may be the biggest headache you've ever had. Whatever you choose, be knowledgeable about the tradeoffs before making the decision so you can proceed with eyes wide open!