Friends and family financing, best practices

[jrineakter]

On many occasions, entrepreneurs find themselves unable to provide all the funds they need to start their project. It is also not easy to access external financing, much less from banks and investment funds. For most, one of the most feasible options is to turn to friends and family for financing . They are the ones who know us best and they certainly know that we are competent people who can be trusted.

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Despite the ease with which we can access this type of financing, more commonly known as “Friends, family and fools”, we will rarely get all the capital from these sources italy number data alone. Usually, the most experienced investors understand this prior contribution as a requirement . Their logic is: if the family does not trust enough to invest in the project, why should they?

Related article: How to get financing to start a business?

Well, we start from the assumption that our closest circle is willing to invest in our business idea. Keep in mind that you must follow some basic rules if you want everything to go well. Just because they are trustworthy people doesn't mean that anything goes, far from it. Here we explain what these rules consist of to get funding from friends and family.

Best practices for getting funding from friends and family
Treat them like strangers
Forget that you know the investor and handle the entire procedure using the paperwork you would prepare if it were a stranger. The reason is simple. Many entrepreneurs have borrowed money from family and friends in an informal manner. The terms of the loan have been agreed upon verbally, without being written down in a contract. This can cause problems for both parties. A written contract will avoid them.

Be honest about the risks, present your business plan, even if only verbally, and put the conditions in writing, whether it's a gift, a loan or a stock purchase.

Consult a lawyer
Funding from friends and family can be a double-edged sword. It is clear that their help is essential at the beginning. But it can also be negative if they try to interfere in the business. There have been many cases of friends and family who, after investing, feel the need to participate and decide on the business. This, taken to the extreme, can be counterproductive for the business and very annoying for the entrepreneur. That is why it is vital to consult with a lawyer before accepting any loan from friends and family, to determine the rights and obligations of each of the parties.

Paying interest is better than selling stocks
If someone lends you money, you only have to pay it back with interest. They cannot tell you how to run your business. However, if they buy shares in the business, then you become business partners. You need to make these terms very clear in the contract you sign with the investor, of course, also with friends and family. The best thing you can do is to opt for a loan and pay it back as soon as possible, but with interest.

Consider non-voting shares
If your friend or relative insists on buying shares in your company, try selling them non-voting shares so they can't overrule your every decision. You may be lucky enough to have some of your friends or relatives who have business experience, so don't limit their abilities. Involving them as shareholders will make them motivated advisors. Plus, they're likely to be softer than outside investors if your business ever runs into trouble.