By Ed McLaughlin and Wyn Lydecker
This is the time of year when we often connect with friends and family we hold most dear. We may share a meal, view some sporting events – and just enjoy time together. If you are thinking about starting your own business, the topic will surely come up – as might the question of how your friends and family can support your new venture with encouragement, and for some – financially. For this reason, we decided it’s a good time to revisit the advantages and disadvantages of friends and family funding.
A Word about Bootstrapping
We still recommend bootstrapping as the best option for funding your startup because it allows you to maintain ownership control and answer only to yourself – some of the reasons you wanted to start your own business in the first place. But you may not have the personal resources to invest in your business without betting the ranch, or you may need the money you would invest in your business for personal contingencies that cannot wait.
One of the most common sources of early funding for entrepreneurs is the “friends and family” round. Here are the advantages and disadvantages we suggest you consider before you move ahead in this direction.
Advantages of Friends and Family Funding
- Your friends and family already know you very well – and you know them
- They will listen to your pitch because they care about you
- They are inclined to say, “Yes.”
- They can give you the time to build your business on your own schedule
- They will let you develop your vision into something others will recognize and value
- You will be set up to hit major milestones and raise the next round of funding from professionals at higher valuations.
Disadvantages of Friends and Family Funding
- Your friends and family may know you too well
- They may not be able to add value because they may not understand your business
- They may not appreciate your entrepreneurial drive
- You will feel highly responsible for any losses they may incur
- You may put the people you love best at risk, if they are giving you a significant portion of your savings
- You may damage close relationships.
Seeking startup funding from your friends and family remains one of the most viable options available to entrepreneurs. If you decide to take this path, be careful to set up the deal the right way and to hire a lawyer to draw up a document that clearly lays out the terms of the financing. You want to give your business a solid liftoff while preserving the relationships of those people you hold most dear.
Ed McLaughlin is currently co-writing the book, The Purpose Is Profit: The Truth about Starting and Building Your Own Business, with Wyn Lydecker.
They are currently offering a complimentary eCopy of The Startup Roadmap: 21 Steps to Profitability here.
Copyright © 2015 by Ed McLaughlin All rights reserved.