Are you at that point where you are wondering how to raise money from friends and family?
Aside from self-funding, friends and family are the main first step and source for financing a new startup company. It can be some of the best money you can raise.
They may be some of your favorite investors. There can also be some pitfalls with serious long term repercussions if you aren’t careful.
Here is the process of how to raise money from friends and family the most effective way, as well as why you should, and what’s next…
Why Raise Money From Friends & Family
There are several reasons that entrepreneurs should raise from this group, as well as multiple benefits of doing it.
This is one of the most attractive reasons why you may want to know how to raise money from friends and family. This is by far the easiest money to raise.
Despite all the hype in the media about raising big money, securing investors is still all about personal relationships and getting them to know you, like you, and trust you. You may not have these connections with VCs yet, but you do have them with your friends and family.
While later institutional investors don’t want complicated corporate structure and diluted equity arrangements, having already raised money from friends and family is a great sign. It shows that those who know you best trust you and believe in you enough to give you their money.
The Best Terms
You want them to get a good return on their investment, but you should still be able to negotiate far more attractive terms and rates with this group than any bank or VC firm.
Help Them Without The Handouts
As part of understanding how to raise money from friends and family you always need to come from a place of caring. You want to help your friends and family financially.
This is the perfect opportunity to do it. If they invest with you, they can share in your success and may gain far more than with their money stuck in a stuffy 401k, boring mutual fund or the overinflated stock market.
If they don’t then when you make it everyone may be showing up looking for a handout. This evens it up a bit.
Gaining Backers & Company For The Journey
The path of a solo entrepreneur can be lonely. Bringing in these people gives you more who want to be out there sharing your product and brand with others. They are people you can talk with along the way. It’s always better together.
Who Counts As ‘Friends & Family’
Before thinking about how to raise money from friends and family you need to know who is part of this broad category. It may include:
- Immediate and extended family members
- Personal close friends
- Fellow students and former classmates
- Bosses and former coworkers
- Friends of friends and friends of family, and family of friends
Identify How Much You Need
How much money and other resources do you need to make this startup venture happen? What do you need to get to the next stage? In addition to cash, it may be labor, equipment, space to work, etc. Maybe they can help with those things too.
Calculate what you can afford to give and give up in return for this. When can you pay them back? Make sure you give yourself some slack here. Everything takes longer and costs more than you expect.
Create Your Plan & Pitch Deck
Before you ask, make sure you do your market research and competitor analysis. Gather any data you have on proof and traction. Put together at least an executive summary, a one-page business plan, and an action plan, as well as your pitch deck.
This will add a lot of credibility to your ask and will give you good practice for approaching other investors later on.
Remember that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Share & Ask for Feedback
Depending on the strength and closeness of your relationship, you may not feel comfortable in just asking for money. An alternative soft approach is to show them your work and presentation and ask for their feedback and opinion. If it is good, they may just volunteer to help you out.
Be Clear About The Priorities & Potential Outcomes
Your relationships are probably far more valuable than any money and this is key when understanding how to raise money from friends and family. Yet, going into business together or borrowing from friends and family definitely has the potential to break or sour relationships. At least for a very long time.
For most, it simply isn’t worth it if that may be the outcome. The best way to avoid and beat this is to be extremely clear about the priorities, risks, and various outcomes upfront.
Ask them not to invest any more than they can afford to lose. How much can they lose and still be happy to talk to you and be your friend? Keep their investment capped at that number.
Be clear your relationship comes first. Though there is still a lot of risk and unknowns.
Create Clear Written Legal Agreements
Always, always, always put everything in writing in a legal format. No one ever expects things to go wrong and disputes to happen. Yet, they are very common. It will go a whole lot better if you have already mapped out how various clashes will go, and clear exits in the case of friction.
Then it is already there in writing and legal. You just follow the paperwork. What happens if you really make it big? When do they get paid and how much? What if you go bankrupt? What if you just fall out or one of you stops pulling their weight and becomes a liability to the business? Who gets to make the ultimate decisions? Put it all on paper.
Remember this will not be the first financing round you do for your business so structuring things the right way with a good corporate lawyer is the way to go.
The way you raise money today is going to truly impact the way you can raise money tomorrow. On the video below which is how rounds of financing work for startups I cover the topic in detail so that you get a good understanding of what is in front of you.
Get To Work
Then it’s time to get to work proving your plan, and networking with your next funding round of investors so that you can deliver on your promises and bring in the money you need to keep going.
Hopefully, this post provided some perspective as you are looking into how to raise money from friends and family.