1 BEST STARTUP FUND FRIENDS AND FAMILY

1 BEST STARTUP FUND FRIENDS AND FAMILY

❏ Today, I’m speaking on the 1 Best Startup Fund, Friends and Family. There are pros and cons to taking money from your friends and family. In short, it is a path that can lead to heartbreak. One must take care before pursuing this path.

One of my responsibilities as an executive coach is to help founders advance from the idea stage to the build stage. Most early-stage businesses, what we call build-stage businesses, need money to build their idea into a business. Most of us start by using our checking and savings accounts and credit cards. However, we all have our financial limits. When we hit that “financial wall,” we need to find outside funding. When this happens, we often think of friends and family for startup venture financing.

Startup Funding Sources – Pros of Friends and Family Funding

When we’re young, we often think of the “Bank of Mom and Dad” when we get into financial difficulty. However, once we reach adulthood, that “banking window” usually “closes.” As adults, we are expected to “fend for ourselves. Fending for ourselves is how it should be for us as adults. However, when we start a business, we are creating an “investment opportunity” and not “asking for a handout.”

If you have started a business, you’ve been talking to your friends and family about it. You most likely began when it was still in the “idea stage.” You spoke of the business idea, the opportunity, and the marketing strategy. For consumer-facing ideas, they said, “Gosh, I love to be able to buy that!”. They may have even said, “If there’s a way I can help, reach out to me.”

Investing in your business during the “build stage” is a great way to help you. It also allows them to invest in support “on the ground floor.” Investment dollars in the form of a “loan” that can convert the loan into company stock are known as a Convertible Note. You could also sell them Stock in your company in return for their “investment.” Neither case is a “gift” of money from the bank of Mom and Dad. Mom and Dad’s bank is a legitimate financial investment.

If you do well, then your friends and family, at a minimum, get back all their “invested money plus interest.” If they convert the loan to equity (stock) or buy stock directly, they will return all their investment dollars plus a nice profit when your company sells.

Startup Funding Sources – Cons of Friends and Family Venture Financing

However, like any financial investment, that investment carries financial risks. The “loan” or “equity” (Stock) that your friends and family invest in your company’s value could change in a negative direction.

It often takes longer to make a company profitable than planned. If you have to raise more money, the new lender may require that the prior lenders be Subordinate to the new loan. Subordination means the new investor gets paid in full “before” the original “Friends and Family” investors get paid back.

Your company could “go bust.” The majority of all new businesses fail in their first five years. The odds are that yours will fail. The possibility of failure is why friends and family need to understand that they could “lose all of their investment.” Ask them how they would feel about you if that happened. Don’t take their money if they say, “I’ll hate your guts.” Friends and family are irreplaceable. Don’t let money invested in a business idea impact you for 50+ years.

Startup Funding Sources – What If My Company Fails?

In a study by Statistic Brain, Startup Business Failure Rate by Industry, the failure rate of all U.S. companies after five years was over 50 percent and over 70 percent after ten years. (Feb. 18, 2017).

Yep, business life is hard. Friends and family money will likely add some real psychological pressure to most founders. In some respects, that kind of pressure can help. Many will look at every dollar they spend much closer. Carefully watching the cash flow can help you avoid making poor choices. But it can also result in “analysis paralysis,” meaning you spend too much time making decisions.

Communication and honesty are the best policies. Could you let your friends and family know earlier rather than later when things get tough? Nobody likes surprises. If you’ve been openly sharing that “things aren’t going to plan” regularly, then announcing that “you’re closing your doors” will be a disappointment but not a “shock.” You’ll sometimes find that one of your investors might offer to step up and help in ways you didn’t expect.

Startup Funding Sources – Planning For Success!

I firmly believe in “Planning for Success” and “Preparing for Failure.” By doing both, I found a better business plan.

When you decide to consider taking money from friends and family, I recommend you start a monthly newsletter. Could you publish it on the first of every month, like clockwork? One page in length. Start with “A Message from the CEO” (you). Have a paragraph that talks about new clients. Include a section that addresses revenue in broad terms. Have a paragraph that introduces new or planned employees. Include a paragraph on marketing. That’s all. Email it to every investor, employee, newspaper, blog, and customer list—everyone you know. A newsletter helps them feel like they know what’s going on with their “investment.” You’ll also find that a newsletter is excellent for bringing in new clients and employees.

Conclusion

I hope this article, #1 Best Startup Fund Friends and Family,? Has educated you on the pros and cons of friend and family venture financing. You will not be alone if you do friends and family venture financing. Some 38% of company funding comes from friends and family financing.