What are some considerations you should make when borrowing money from friends and family to seed a startup?


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The question speaks for itself. There are similar questions, but I didn't find one that provides a checklist of things you should consider before and after borrowing money to fund your business.

I'd really like answers from people who have gone down the path personally. What did you do right? What did you do wrong?

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asked Sep 10 '10 at 08:40
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Javid Jamae
347 points
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3 Answers


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  • Only take money from people who can afford to lose all their investment.
  • Be clear in your communication that they may lose all their money
  • If you choose to ignore those two above then you are at risk of losing friends/family
answered Sep 11 '10 at 23:59
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Tim J
8,346 points

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There are several possible scenarios, and I'm not sure which one you're referring to.

The first one, you're borrowing money personally, and you're guaranteeing the repayment regardless of how the business does.
The second one is more of a business transaction. You're borrowing the money, and if the business makes it, you'll repay it, maybe with interest.
The third option, you're offering people a convertible note. They're basically investing, but choosing the note as an investment vehicle.

The first case in ways is the simplest, it's just a personal loan, and you'll need to contemplate what you'll do if the business fails and you need to figure out how to repay the loan.

The other two cases are not much more complicated, but you need to have clear paperwork that explains the details of repayment. Thefunded.com and other places online provide some info about that.

The most important part to remember in the last two cases: people should only lend you money that they can afford to lose. Investing in a startup is very risky, and there's a very good chance these people will never see their money.

answered Sep 10 '10 at 13:27
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Dror
1,833 points

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I recently wrote this article as a guest blog post on the Startup Professional Musings Blog.

According to a report distributed by the Angel Capital Education Foundation, total startup funding from venture capital funds, state funds, and angel investors totals approximately $20.8 billion annually. Surprisingly, friends and family contributed nearly three times the amount of capital to thousands of startups each year. With approximately $60 billion in startup funding coming from friends and family, entrepreneurs must consider this as an option as they seek to launch new businesses.

Money issues between friends and family can ruin relationships. Due to the risk involved with investing in a startup, if you are requesting investment from friends and family, be sure to consider these five steps before you begin the capital raising process:

  1. Prepare a pitch. Just because you are requesting investment from your mom or a group of your college buddies doesn’t give you an excuse to be unprofessional. Take this opportunity and the potential risk taken by your investor seriously. Do your homework, and prepare a professional, persuasive and passionate presentation. You want your friends and family to buy into your vision, not just hand over some cash because they feel obligated or pressured.
  2. Have a game plan. When you are seeking angel investment or venture capital investment, you will need a strong business plan, but do you really need a business plan for your friends and family? Instead, you might consider a vision, strategy, and tactics plan. You will start by developing a vision for the future of your business, then strategies to reach your vision, and finally day-to-day tactics to accomplish your strategies. For example, assume that you have a vision of becoming the leading online retailer of picture frames. One strategy may be to utilize search engine traffic to bring in customers. Finally, you will develop tactics such as building quality links to your website through social media and professional article writing to boost your rankings in the search engines.
  3. Have an exit strategy. Angel investors and venture capitalists want to know how you intend to grow their investment. They want to know when and how you intend to repay them, with interest. Your friends and family should be no different. Although you want to disclose the fact that investing in a startup is risky, you should also outline a detailed strategy for the investor to exit profitably. Maybe you will structure the capital as a high interest loan, or maybe they will own a percentage of the business and be repaid through the profits. No matter the structure, you should have a detailed plan for repayment.
  4. Consider making it official. Depending on the size of the investment you may consider hiring a lawyer to file the necessary paperwork to make everything official. Obviously this will give the investor peace of mind, and it should help you in the future as you seek angel investment. Making it official gives you credibility for future rounds of investment. Remember to use judgment though, if your buddy is going to invest $10,000, and the legal fees amount to $2,500, you may want to resort to a firm handshake.
  5. Follow through. Again, investing in a startup is risky, and your friends and family probably know that, but they should expect to earn a return on their investment. Don’t view this capital as a gift, instead follow through with what you promised. If things don’t go exactly as planned, be sure to communicate regularly so that they know what to expect. If at all possible, follow through. If you fail to deliver as promised you risk your entire relationship and your ability to raise capital in the future.

As you seek capital for your startup don’t neglect the $60 billion opportunity represented by friends and family, but tread carefully as you risk something far greater than the failure of your business--your relationships.

Today's guest blog is by Adam Hoeksema, founder of the ExecutivePlan. Adam is the author of a blog that primarily assists entrepreneurs in the process of writing powerful executive summaries, preparing elevator pitches, and hurdling the many obstacles encountered during the startup phase of a business. His blog is http://www.theexecutiveplan.com.

answered Sep 23 '10 at 09:03
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Adam Hoeksema
96 points

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