How to Raise Money Through the Bank of Friends & Family

If you are starting a new business, chances are that you will raise money for your startup company from your Friends and Family members.

After exhausting your personal savings, you will need to find other creative ways to fund your business.  Tapping into the “Bank of Friends and Family” is one popular way to raise money for your company.

However, raising money through friends and family can be very tricky.  To keep your business and personal relationships on the right path, it is important that you know the right way to finance your company with friends and family investment.

In the video below, I discuss the pros and cons of raising money through the Bank of Friends and Family, and I provide 5 important tips to help you do it the right way.

Let us know if you plan to raise money through friends and family in the comments to this week’s video below.

The following is a summary of the key points mentioned in this week’s video:

The Pros & Cons of using Friends & Family to Raise Money for Your Business:

The Pros:

• Availability – It is easier to raise money from people who already know you and support you than it is to raise money from outside investors.
• Flexible & Favorable Terms – Friends and Family members may be more willing to give you more flexible and favorable terms and there may be less negotiation required to secure the financing.  Also, Friends and Family may be more understanding about your personal business situation than outside investors.
• Speed to Money – Raising money from friends and family tends to be a much quicker process than other financing alternatives.

The Cons:

• Risk of Relationship Damage – If you don’t communicate properly or provide your Friends and Family members with sufficient information about their investments, then there is a big risk that these important relationships could turn sour later on when the investments don’t turn out well.
• Extra Pressure to Succeed – As Friends and Family, your investors will be a large part of your life, and you may feel extra pressure from them to make your business a success and protect their investments.
• Negotiation Tension – You will have to balance the financing negotiations so that you are fair to your Friends and Family members while securing the best funding deal for your company.
• Unrealistic Expectations – If you take money from Friends and Family, then there may be times when they have unrealistic expectations about the timing and level of return that they should get on their investments.
• Let Me Help Run the Business – Your Friends and Family members may pressure you to get involved with the business or to help you run it, and they may not be qualified to do so.

5 Tips to Help You Raise Money From Friends & Family the Right Way:

1. Set Proper Expectations:

• Give your Friends and Family members the full story about the upsides, downsides and risks to the investment, so that they have all of the information that they need to make an informed investment decision with a proper set of realistic expectations.

2. Communicate Clearly and Often:

• Be prepared to keep your Friends and Family members updated about your business and its progress, so that there are no surprises down the road.

3. Document the Deal Properly:

• Formalize and document the investment terms like you would with outside investors so that you limit any misunderstandings or misaligned expectations in the future.

4. You’re Selling Securities! Get Help to Avoid Legal Issues:

• Only raise money through Friends and Family members who can handle the potential loss of their entire investment, sell only to Accredited Investors and make sure that you comply with the applicable securities laws.

5. Do it Right! Treat Your Friends and Family Right:

• This Seed Round investment is an important first step that may help lead your business to investments from Angel Investors or Venture Capitalists down the road.  If you don’t treat your Friends and Family right from the start, or document the deal properly, then it may be more difficult for you to obtain more financing in the future.