Congratulations! You’ve decided to take your brilliant idea and make a business of it. You’re already in the top one percentile of people who actually act upon their ideas.
You may have a co-founder or a team of co-founders and you’ve spent quite a bit of time thinking through and developing a plan. The product plan; the go-to-market plan; how your products will be made or offered to users and clients. Hopefully as part of all that you’ve pulled together a financial plan that helps you understand how much money you need to get started with this great business idea, and how much you’ll need in funding as the business takes-off.
Now, where is this start-up funding going to come from? Likely some combination of personal funds from the founders, some angel investors and later when you gain some traction with your product release you may gain interest from a venture capital firm who does early-stage investments. These are all typical sources of funding for a start-up.
As you are going through this initial capital raise journey your friends and family will likely ask you how it’s going. You’ll share your story, the progress and if you’re the founding CEO you’re likely a good storyteller. You’ll probably find some of your friends and family excited about your new business venture and some may ask if you’re looking to raise money...they’ve become interested in investing in your start-up business. Be careful…
These are people with whom you are close...you have a blood relationship or one through marriage. These are your friends and your friendship with them predates your startup venture. Money changes things.
The moment your start-up takes money from outside investors, you are now expected to deliver a solid return on their investment. You are expected to keep them informed of the company’s progress and challenges faced along the way.
When you take money from friends or family, understand the obligation you are taking on.
As a good start-up leader you’re expected to communicate regularly with your investors. Since these are your friends and family, you cannot ever disappear on them and you must be responsive at all times to their inquiries.
Even when there is no material progress in the business since you last connected with them, or there is nothing to share but bad news or disappointments, you have an obligation to respond and share some of what is happening with the business and their investment.
Some angel investors are knowledgeable and sophisticated in the area of early-stage investors and others are not. The same will be case with your friends and family members who express interest in your start-up.
When a friend or family expresses interested in investing and they are not particularly knowledgeable in start-up investing it’s very important to walk them through what their investment get them. What type of ownership they have (equity shares - common, preferred) or their investment is treated as debt of the company (a convertible debenture), or if they are investing in a SAFE note (and explain what a SAFE note is). Unsophisticated investors may think they can withdraw their money from the company at any time (they can’t); or they may believe they’ll get some form of annual payout from the company like a dividend or interest payment (they won’t).
When taking money from friends or family for your start-up clearly explain how the investment works, what the liquidity events could be, and how long their money may be tied up in the company.
A good founder/CEO will spend always money wisely, and especially so while the business is relying on investor funding. You’ll treat every dollar of outside investment carefully. But when the seed capital raised includes money from friends and family there is some added pressure.
Some would argue this added consideration helps reinforce a founder’s commitment to the business venture.
There could be members of the founding team that bail out after some time, or when the going gets rough...these types of folks weren’t really start-up material or start-up ready to begin within.
In general founders will stick with the venture through the tough times but even the most patient and persistent founders will occasionally question their own commitment. Thoughts of being able to make good money doing something else with less stress happens to every founder...anyone who tells you otherwise is not being honest. When you know that could could be walking away from investors that include your friends and family it naturally makes you think long and hard about the consequences of walking away.
Friends and family are a great source of start-up funding. They’ll genuinely listen to your idea and plan, they may overlook some soft spots in the opportunity just to be supportive, and they may reach a decision sooner. Taking money from any investor brings obligations and pressure to perform...taking money from friends or family amps up that pressure.
You’re up for it...you’ll make it work and be successful!
Thank you for investing time in reading this post. Questions and comments are always welcome.
Shail Paliwal
Comments