Even if you plan on living on ramen while building a new company, you’ve got to have a little cash, if only to pay for the ramen itself. One option to get that money is to raise funds from your friends and family.
There’s an obvious danger here: if anything goes pear-shaped, you’re going to have to figure out how to make it right with the people who mean the most to you. Declaring bankruptcy and walking away isn’t the same when you are expected to spend the holidays with your creditors. You’ve got to make sure that you’re protecting your personal relationships from the start.
Consider Alternate Funding Options
Personally, I don’t like the idea of raising money from my loved ones. Your family will almost always see it as a loan and that can change the nature of your relationship.
It’s definitely a personal decision, almost more than a business decision. If you have any alternatives on the table, though, see if you can get the money you need that way. There may not be any alternatives, but make sure you look.
When Mom pulls out the checkbook, keep it to the bare minimum you need to function. You don’t want to find out that a family member dipped into her retirement account for you or had trouble paying her own bills.
Treat It As a Loan
Don’t consider the money you receive from your friends and family to be an investment, especially since they probably won’t. The odds of your loved ones being accredited investors who really understand the risks of what you’re doing is low, making it unwise to ask them to invest. Rather, you should approach the question as a loan and make sure that you have a plan to pay it back, even if your company fails.
Write a Contract, Always
When it’s ‘just family,’ you may want to skip the paperwork. That’s a bad idea, though: if everything isn’t written down explicitly, it just takes one misremembered piece of information to cause problems. In fact, it may be more important to actually do the paperwork properly with your loved ones than with any other type of investor.
Put down everything:
- The exact amount of the loan
- How you’ll receive the money
- When it will be repaid — or at least when you’ll know if the business is successful enough to repay it
- Any interest you’ll be paying to your lender
- How it will be repaid (scheduled payments, check or cash and other pertinent details)
You should both sign it and stick to it. That way, your personal relationship won’t be impacted by your business involvement (or, at least, it won’t be as impacted).
Image by Flickr user Tiffany Terry