Every start-up begins with a brilliant idea, but to get your businesses off the ground, you need seed money. There are a whole host of ways that startup founders generate funding, including angel investors, bootstrapping, crowdfunding, and seeking venture capital, but another common means of doing so is asking family and friends to pitch in their money to help make your dream a success.
According to research from Fundable, 38% of US startups receive funding from family and friends. This type of funding can be a good way of raising investment very early on in your business’ journey, when other investment types are least likely to commit. They can also ensure you retain complete control of the business too. So, how is best to do it?
Things to consider before you ask
Prior to pitching your idea to your close ones, you need to think through the decision, as there are risks attached to it. Ask yourself:
- How much funding do I require?
- How much will family and friends likely be willing (or able) to contribute?
- Will they appreciate the request?
- Am I happy adding a risky business dimension to my personal relationships?
- If the startup folds and they lose their investment, will we be able to repair a likely fraught relationship?
- Are my family and friends aware of the risks inherent to startup funding?
- Where is the money coming from? Can they afford to contribute, or will it harm them financially?
How to ask for startup funding
If you are satisfied with the answers to those questions, you next need to work out how you are going to ask for the money. It’s a tricky conversation to have, so approach it professionally.
Approach your family and friends confidently and clearly. Allow them to ask questions and provide clear answers. Give them as much information as possible. Transparency is key.
Treat the situation as you would a serious business agreement. Create a written prospectus that includes all details of the business plan, written terms of the investment, what returns investors will earn, and the risks involved with investing.
Set a clear limit on what people can contribute, and how. In 2020, statistics from Key’s Market Monitor showed that 26% of UK equity release customers gifted the funds to family and friends, and 2% of these gifts were used to help the recipient’s business. Your family may wish to support you via equity release. In this case, a limit will prevent them from releasing too much value from their homes, and a refusal to accept money taken from pensions will reduce the risk of them losing further money. The funding should never put any of your friends or family under financial stress
If they choose to invest, provide official confirmation of their investment via paperwork. Keep them up to date with how your startup is performing every quarter, and if the business isn’t as successful as hoped, don’t beat around the bush – tell your investors just as you would a professional angel investor.
Gaining investment from family and friends can be a good way of raising money, but it carries a range of risks. Always exercise diligence and openness, and be sure to set limits, protecting yourself and your close ones from future financial and relationship problems.