Can Friends and family equity funding work for your startup? Yes, absolutely. But be aware – you’re treading on thin ice
How many times have we all heard “never mix money/business and family” or the same for money/business and friends? Too many times to count more than likely. There’s also another saying though, which is often forgotten when it comes to talking about business and money and that is “friends and family first above all else.”
The fact is there are downsides to practically every form of funding out there and sometimes, despite your best efforts as a startup CEO, there’s simply no way you can convince a VC or angel to give you money in exchange for equity in your company.
You may not yet have a totally proven concept. Perhaps they’re asking for too much equity, or they want to completely change the scope of your business beyond what you’re comfortable with. Then there’s the fact that most investors have their favorite industries and sectors they prefer to invest in; maybe yours just doesn’t do it for those you can actually manage to get a meeting with.
Enter Friends and Family Funding
As a CEO in need of funds, neither family nor friends may be your preference. After all, if your business fails you’ll sleep a lot better having blown a stranger’s money rather than your parents, siblings, or best friend’s money, right?
While that may be true, there are benefits too, such as having someone by your side invested in your company and committed to its success – not just because their money’s on the line and they want to get it back, but also because they actually love and care about you as a person.
As long as all parties involved are completely aware of the risk (ie., making very little or losing the entire investment), and you each establish there must be autonomy between your business and personal relationship, an equity investment with friends or family is a great fit for funding a startup.
Family Partnerships Can be Wildly Successful
If you’re still in doubt, take a look at the Mars Candy Company; a wildly successful private family owned company with 65,000 employees, whose entire board of directors is still comprised of 100% family.
Founder Frank C. Mars didn’t believe in selling off equity shares to investors or stock holders. And all that have come into leadership after him have stayed the course and kept everything, including funding needs, entirely in-house over the 100-plus years the company’s been in business.
How to Make it Happen – The Right Way!
There’s a definite right way and wrong way to bring your friends and/or family into your business as equity investors.
1. Decide how much for how much
How much money do you need, how much can they give, how much equity in your business do they get in return? You’ll also need to decide on whether the equity they’re getting entitles them to a say in how things are done. Will they be a silent partner who cashes in on the profits, or will this be a partnership in every sense of the word?
This process may not iron out as simple as it sounds, but this is the basic information each party needs to agree upon before moving on to the next step.
2. Hire a business lawyer
It’s really important to do this. It will exhaust more of your already limited funds, but a business lawyer can walk all parties through the pitfalls that lay in front of them. Most important, a business attorney can draft up an iron-clad partnership agreement that will help each of you sleep better at night, ensuring all the cards are on the table and that nobody has any expectations that will never be met. This will help significantly with the next step.
3. Before shaking hands, agree business and pleasure don’t mix
Establish that the agreement you’re all signing into is indeed risky. With 8 out of every 10 businesses in the US failing every year, there are no guarantees, despite how confident each of you might feel about the business’s potential.
It’s important to agree on the fact that none of you want to be sitting around a family dinner table months or years from now feeling animosity toward each other and making the rest of your friends and family uncomfortable.
Friends, Family and Business Can Co-exist – if…
It’s all about learning how to separate your love for each other from the ups-and-downs that will invariably affect your business as it progresses.
If you’re interested in setting up a loan agreement with family or friends, rather than offering up an equity stake, read this article on SBA.gov for some insights into family business loans.