Startup Science: 10 tips for Friends and Family Funding

 

  1. Be considerate. Only take money from people who can afford to lose it. Only take liquid assets. Don’t have grandma take out a second mortgage on her house to help fund your startup. 
  2. Be fair. Don’t cheat your friends and family investors by over-valuing your startup.
  3. Be professional. Treat this like any other funding round. Know exactly how much money you need to move your business forward and exactly how you will use these funds. Write a business plan, list each milestone and then itemize any purchases you need or any activities you need to do to achieve it. Small details are important.
  4. Incentivize. Offer a decent incentive to invest and be clear about what friends and family receive in return for their investment: equity; stock options; profit sharing or interest on monies loaned. Work out how you will offer this e.g. will it be a convertible note where they receive equity in the next funding round?
  5. If profit sharing be clear about how much profit you will give, when you will start sharing profit and the total maximum amount you will pay eg 10% of profit after the first $50 000 up to three times the amount loaned.
  6. Have flexible loan repayments. If you decide to take money as a loan, write in loan terms that allow flexible repayments so you can prioritize keeping your startup afloat during difficult times. Decide whether you will receive the loan all at once or whether it will be tranched based on time or milestones.
  7. Say no to ‘no interest’ loans. Do not take money as a ‘no interest’ loan or with interest below the market rate as this can cause tax issues for your F&F lenders. The rules are different in each country, so check with a local accountant before you set up the loan agreement. Loan agreements can be found for free on websites like www.legalzoom.com.
  8. Decide on active vs passive investment. Will your friends and family investors have an active role in the company? If so, clearly define the role with expectations, milestones and limits.
  9. Have a capitalization table. This will help you keep track of investors and ownership at each funding round.
  10. Incorporate first. Incorporate before raising funds even from friends and family. It will make it a lot easier to manage your money and your equity in future rounds.

 

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