Pane Ventures

Friends and family are not sophisticated investors

Raising friends and family money for your startup can be a great way to get the capital you need to get your business off the ground.

Indeed, it can be a great source of financing for early-stage startups, as it is often very flexible and inexpensive. However, it’s important to understand the pros and cons of this type of financing and to be aware of the potential risks involved.

When raising capital, it’s important to assess how much you actually need and to choose the right instrument. You should also determine a valuation and prepare a term sheet, as well as a pitch deck and financial projections. Finally, get a lawyer to review the legal agreement to make sure there are no blind spots.

Whilst friends and family financing can be very attractive, it can also lead to difficult situations if the terms aren’t clearly defined upfront.

KEEP IN MIND: Friends and family are not sophisticated investors…

Uncle Gary might call you multiple times a day for updates; Aunt Sally may ask if you can return part of the money today to renovate the bathroom which she’ll give back in a couple of weeks; and Josh may keep suggesting you float on the New York Stock Exchange early next year.

If you’re prepared to deal with all of this, then do it!

If not, don’t.

Whichever way you do decide to go, proceed with caution. Unfortunately, 90% of startups fail. If you lose their money and have to see them often, then you might never hear the end of it.

Also, they may never speak to you again!

Which might not be a bad thing.