Financing Options: Friends and Family

Comments (Archived):

1. Since everything growth organic friends and family are indeed the best place to depart into a startup. As a spark they are great, but when you want to scale and your business is something they hardly understand, friends and family can turn into an obstacle as well. I found the most valuable investment friends and family can make is psychological help. When it comes to financial support entrepreneurs have to quickly anticipate the limits of the relatives and friends support. The more the startup “market” growth the more everyone has to solve the most challenging problem of all startups: How to support startups from the beginning? Naturally friends and families have been the number one source, but I believe that’s a compromise, which can be replaced by something more reliable and effective….The fact that most successful startups began in a garage or at their parents house suggests that no one is prepared for people who want to apply their imagination…

2. Friends is okay (as long as they understand the risks) but family is not in my book.I like my Christmas dinners, everyone is happy and there is no tension. I want to keep it that way. 

   1. that’s a good approach if you can pull it off

3. ” But friends and family can get you into business and give you some time to create value that other investors will recognize and value.”Good point – if  the ones in know don’t believe in you, who would ?”I’d suggest a cap that gives the friends and family around 10% of the business if things work out”Or allow them to cashout in follow on round

   1. “Or allow them to cashout in follow on round” – Good idea.  The sooner you can get them liquid again, the better for the relationship.  Though you do have the possibility that the company turns into Google or Groupon and now they feel slighted for cashing out early and you not ‘warning’ them about how big it might get.  Sometimes you just can’t win in this situation.

      1. If you that big and are going IPO then there is always “friends & family” stock.Don’t think there is a “friends & family” option for a non-public liquidity event.But agree with you that it’s hard to seem fair if they cash out and you strike it big.  It’s a razor’s edge when relationships are involved, no matter how much & how regularly you communicate and keep it at professional level.I would rather F&F cash out earlier, and then find other means to share profits if striking big.

         1. In the end, I agree.  I’d rather they recoup their investment as early as possible to avoid any kind of issue with the relationship and sort the rest out later.

      2. Get them back their bait but let them use the “free worms” for a long time because when you hit it big they will never stop talking about it.

         1. i love that approach JLMgreat suggestion

   2. i would not offer them the cash out option upfront because some investors in the next round will balk at that. but i would seek to make that option available if the investors are ok with it

      1. Fred any idea how to do a friend and family in a private sale ?

         1. what do you mean by private sale?

            1. Question is how to safeguard interest of non professional angels in follow on rounds. In some sense it’s a fiduciary responsibility.Private sale as in an acquisition.

            2. you can cash them out and give them a warrant to give them some upside in anacquisition

            3. Thanks

4. i think the key to fundraising from friends and family is clear communication.F & F take what they see in the media and say “you’re gonna be the next Facebook!”so be sure to manage expectations, while still doing what you need to do to get them excited and involved.and, be sure to keep the lines of communication going as you build the business… you’re going to need to go back to them for signatures etc., so it’s best to keep them up to date.

   1. [F & F take what they see in the media and say “you’re gonna be the next Facebook!”]I think this is actually the best thing about F&F – they’re your biggest fans. yeah you gotta take it with a grain of salt, but that’s pretty much true ever since my ass got stomped on the basketball court. the point is, you’re looking for dough to go big, and you think you can go big, nothing wrong with having a few biased cheerleaders back you up.plenty of other investors / critics will bust your balls, leave it to them. 

      1. they’re your biggest fans anyway 🙂 no money required…

      2. fair.i really just meant managing expectations in terms of returns and the timeit will take.

         1. yeah i was agreeing i think, just going a little deeper into that point.although, I have an Asian Tiger Mom so it is never quite cheer leading, just quiet suspicious worried pride 😉

            1. hahaha…**same for me, except Portuguese.

            2. here’s to intense immigrant moms *beers*

            3. cheers!**

      3. Depends on your family….

   2. Ok, how do you manage the communications aspect

      1. just keep them updated via email with any major news.**

         1. I keep it to regular monthly updates and always thank them at the end of it. Lots of metrics, indicators, etc. 

5. I heard from a VC that it is said to be three f’s (FFF). Friends, Family and some Fools.I believe most of the businesses started by a first time (not so wealthy) entrepreneur are through this model (when i say businesses it is from setting a grocery shop to computer manufacturing). Probably it is easy to convince your friends and family with the ‘NUTTY IDEA’ you got while taking bath … and you are convinced about how it will … yes, you have thought over it for months…. which no financier will appreciate or approve unless he sees the prototype.But when it comes to financing a start-up the two F’s are ready take more risk than any other Angel or VC…because they believe in YOU than your IDEA. It is more of EMOTIONAL FINANCING than a Commercial financing. Emotions don’t work in business and so as the post suggest better to avoid such financing. It is just like giving advice “it is better to avoid driving while drunk and smoking ” … but alas the ride is so f——interesting many do it that way and there are many successful businesses out there which were done that way.

6. I’m not sure I could run a business funded by family and friends that I care about, the pressure to not lose their money would be paralyzing.  It’s like playing poker with borrowed money, you are so focused on capital preservation that you miss out on making risky moves in good spots because you could possible go busto.  You can’t win in business or poker by trying not to go broke.  You have to be willing to lay it all on the line, or most of it, when the opportunity arises.

   1. You need to Cowboy Up, Pard.You can be a bull rider or a rodeo clown but not both.Entrepreneurs are bull riders. You have to focus on the bull and hang on for 8 seconds and nothing else.The variable is not the bull, it it YOU.

      1. I wondered when I would see a Bull Riding post from you. Great time to use it.

7. My dad funded my first company $20k. When I wanted to experiment with something that would take $7k, he invested that. That became ChiliSoft 2 months later; he didn’t live to see it, and I Imagine that drove me through a lot of challenges. That said, I don’t think I’d take money from family again. I prefer investors I get to know rather than friends & family, because the emotional toll can be significant when things are rocky–and they will get rocky. Here are the rules for friends:1) It must be money they’re willing to lose. The reality is you feel obligated to return their money anyway, so it’s basically a debt.2) They must agree not to stop in the business as they please. They get monthly email updates like any other investor (with metrics, etc–saves a lot of time). 3) It’s important to limit the number of F&F investors–gets complicated quickly, and you can bet you’ll need to go back to the well a few times because, well, you’re almost never right about growth or closing an investment. 4) What could possibly go wrong? They disagree with your decisions, like firing someone they are friends with or attempting to get involved in later financings. Christmas one year almost didn’t happen because I stuck to my guns about a necessary firing. 5) They’ll like you when you win. Not that they won’t if you lose, but in between can get murky.Try raising from customers–sell something. If it’s a consumer internet play, that’s tougher, but try to have something in place so you don’t have to keep going back to the well. 

   1. I 110% agree on “you feel obligated to return their money” … My first start-up was dead … i could not find a way to generate the money from that business and return … they will all say no if i earned and give them… I could not imagine where the money would come from. Luckily one of the competitor was interested in the code … and i settled the borrowed money … that was one of the happiest moments of my life.The emotional turmoil i went through for that 1-year was nasty. 

   2. Right on, Charlie.  The fact is that family and friends are (for the most part) NOT investors, so treating them as such will likely have a bad ending.  At the same time, they can’t view this like any other thing they talk with you about, because there is so much emotion (and money) invested.In general I’ve tried extremely hard to keep business and personal completely separate – but when you have the burning desire to create something, this is the shortest path to money you will ever find.  So, it comes with all the strings attached, but do you want to get on the roller coaster or not?I like Fred’s suggestions on how to structure – a typical family member or friend will have no idea what any of this means most likely, so I’m not sure how much it really matters in the end.  Just realize that taking this type of money is the most emotional money you will ever take, which also means it’s the most irrational.  Even more than VC’s 🙂

      1. I tell ya, as soon as I take money from someone I’m way committed to making it work, and I don’t take money lightly because of the commitment that comes with it automatically from me.I took some investment for Jawaya from a great guy and friend, but not until I knew I was likely to knock it out of the park (or so I believe 😉  ).So there’s positive aspects of it too…you know I’m not running for the hills at the first sign of trouble or some other opportunity if I’ve taken capital of any kind, but even moreso from friends…

   3. Not to go all Freudian on you but there is no greater currency available to a man than the approval of his Father. Not Father’s Day “hey Dad I got you a tie” approval but professional approval of your life’s work.It is truly a tragedy that you did not get to share that moment.But know that he knows and he is proud of you like only a Father can be.

      1. ok doctor filial piety…

      2. last thing I remember him saying was ‘go get ’em char’

   4. “Try raising from customers”…this is always my first thought and I think it’s great advice.Even if you can’t raise enough from customers to do everything you want…IMHO starting sales and showing there actually ‘are’ customers for what you are trying to do will help with every other type of funding option as well…

      1. I really like this article on bootstrapping…http://www.inc.com/magazine…

         1. Awesome read…thanks for sharing it!

   5. yup. i hope readers get to the comments because you explained a lot of what i was trying to convey in my post

      1. I know you take friends on as LPs, but they’re long-term friends mostly from the VC world, I would imagine. Ever take family money?

         1. yes, as LPs but not as direct investors in startups

8. F&F would not be my first option. When starting a venture I want the smartest people surrounding me (investors included)… people that can increase the chances of my success. I also don’t want F&F draining my energy and time.  So, unless the friend or family offers valuable incite into the market I am building in, or is an expert in a certain area important to my start up’s success… I’m hesitant.

   1. The real problem may be that those SMART people don’t want to be around YOU. Hell they’re smart, remember?Don’t turn your nose up at F & F.Where do you got your big brain from?Just the slightest bit of cheeky tongue, mate.

      1. JLM, I appreciated the cheeky tongue.  Robert

9. Remember one thing about F & F — they are investing something that will be in damn short supply when you are swimming with those toothy piranhas (oops meant to say VCs).LOVEIf taking their money makes you a bit more attentive and gets you out of the fart sack a bitter earlier or otherwise quickens your gait a bit.Good.

10. Remember one thing about F & F — they are investing something that will be in damn short supply when you are swimming with those toothy piranhas (oops meant to say VCs).LOVEIf taking their money makes you a bit more attentive and gets you out of the fart sack a bitter earlier or otherwise quickens your gait a bit.Good.

11. Good post, Fred. One observation I would add is that the transaction costs of making an investment in a startup (or in any private company for that matter) make it very difficult to invest small amounts and therefore cut off a lot of potential friends and family funding. To paper a deal even with the simplest terms will cost a few thousand dollars in legal fees, and not doing legal documentation is a sure-fire recipe for conflict later on. This means that it’s tough to invest less than about $10K-$20K in a friend’s or family member’s business — it can be done, but it tends to be the exception. There are lots of people out there who would love to invest $500 in a business but can’t afford to put $10K behind something as inherently high-risk as a startup. The effect of this, in my experience, is that it creates a huge class bias and cuts off many potentially great businesses. Entrepreneurs who come from backgrounds in which they have friends and family members who can invest significant amounts are able to get off the ground, build a minimum viable product and at least get to the stage where angels and VCs will look at them. Meanwhile, those from less privileged backgrounds (who historically have often been the more ambitious and successful entrepreneurs) aren’t able to tap their friends and family for the smaller investments that they could make, and as a result the entrepreneur never even leaves the starting gate.

    1. yes, there is class bias in startups like all other parts of lifedoing a F&F round via a convertible note will reduce but not eliminate the transaction costs

       1. I’m not sure we need to or should accept the class bias as a given, though – entirely ignoring social justice issues (which I don’t think are relevant here), there’s a market failure where potentially great businesses aren’t getting off the ground because the entrepreneurs don’t have the right family background. A system that facilitates smaller investments from friends and family would go a long way toward reducing the bias and bringing a wider and better pool of startups to the point where they could seek angel/VC investment. Crowdfunding platforms that allow for equity investments, rather than just donations/return-of-capital, are one approach (and we’re getting ready to launch one ourselves), and I hope creative entrepreneurs and VCs will be able to think of many other structures that achieve the same purpose.    

          1. Well, here is the hoping that crowdfunding will be legalized!

       2. It’d be great if someone did something to change or at least help to level the class bias.So many talented people, so many poor communities… 

    2. Very thoughtful comment. Personally, I liked the fact you mention the historical ambitious nature of many that come from less privileged. It does make it harder; it does not make it impossible.

12. Great post Fred, but as I think about first money into a company, you can’t’ forget the founders themselves. When we started Stac (made the Stacker disk compression product of yore) back in 1983, 9 of us chipped in $1,500 each to get started as a consulting outfit. Then we got some customer funding, then when we decided to see VC funding, we first went back to ourselves in addition to F&F. I cranked up all my credit cards to put in as much as I could and the working founders (there were a few “outside advisor” founders) did similar things and we also went to F&F. I suppose that if I have a question here, it’s this: While it may be assumed that the founders are putting in what funding they can at the start, is it not a key decision point in the founding as to which of the founders is capable of putting cash into the company at those early stages? I also believe that putting this kind of skin into the game is key to attracting other investors. As an angel investor, we did a round a couple of years ago where some of the founding team was keen to get in on the round. As a board member of this company, that level of belief was a very strong statement of their commitment.

    1. yes, putting up the money yourself is a great option but i don’t consider it”financing” when you are writing the check yourself

       1. Fred and Bob,I encourage founders to document their investments of moneyas a convertible note—I do consider that an investment beyond their foundersstock.  Founders stock is for the sweatthey are putting into the company, but when founders also put in cash Iconsider that a financing.I think if founders do not document their monetaryinvestment it will just become part of the basis in their founders’ stock ifthe company does a VC round.  If thefounders’ investments are documented as a convertible note, however, thefounders can at least get preferred stock (and so more shares) for their monetaryinvestment when the company does do a VC round.  The founders’ money shouldbe just as good as an investor’s money.

          1. that is great advice

13. Fred, Is promising a return based on a percentage of the money borrowed a bad idea?Say, someone is willing to give you 10k, is a 20% return promise say in 3 years of the initial investment a bad approach? Also would you think that promising a small portion of the equity, say 1% in addition to the return promise, is that too much?Is in my personal nature to be generous to people who trust me and am constantly reminded that regardless of the potential of your startup or product… at the moment of the investment most startups borrowing moneys from uncles or cousins are really not worth much.what do you think?

    1. i would never promise anyone a return on a startup investment

       1. Thanks.

14. Great guidelines. On the separation Family and Finance comments, KNOW YOUR AUDIENCE – some F&F can hang, most can’t AND money does change everything.  

15. Having built companies both with F&F investors and without – its a no brainer to forgo F&F if possible.  Finding angle investors who truly understand the risks, rewards, and challenges of building a start up is a much better route for everyone involved.  Not always an option but should be considered before just defaulting to F&F.Even when things work out great – they can be tricky.  Do you really want to be privy to your in-laws (fictitious) quibbling over who gets what in their investment partnership?  Do you want your sister to know the details of net worth?   Of course when things don’t go great and you have to explain what a “down round” or “cram down” is – that no fun either.  F&F never reserve cash for future rounds which is also a problem in many cases – even if not a down round. Running a start up is stressful and difficult enough with involving the only part of your life not being sucked into the vortex of the all consuming work required to build a company from the ground up — Friends and Family.   They have tremendously valuable capital that can help any entrepreneur – its just not their cash.  (at least in my case – and they all made money – go figure).Gregg FreishtatCEO, Vertical Acuity

16. Sadly none of my friends and family can raise the kinds of money that my business will need to get traction; my lack of well-off friends and family is sad given they all think the business is sound and that even I could make a go of it ;)So there’s the option to go for a really long build-up, carefully keeping the profile low to prevent better funded competitors taking the market until there’s a sufficient revenue to go for a ramp up. There are more risks in the long build-up than the other option: finding VCs/angels who get the business idea who wil provide the necessary funds to go for the ramp-up out of the gate. So I just have to keep progressing along the path I’m on. Or wait for Fred to reveal the answer in the next post in the series about financing options…

17. With the divorce rate in the U.S. likely approaching the startup failure rate, and assuming that Family capital originates at least partly from the in-law side in say 50% of cases, that could lead to some pretty grim investor encounters. Kramer vs. Kramer vs. Union Square Ventures?!

18. So, you’l write about FOOLS in a seperate post?Has 3F’s not always been Friends, Family and Fools?

    1. i don’t plan on writing about fools

       1. Damn – there goes my hope of ever being the topic of an AVC post! 😉

19. I once saw a quote that said (paraphrasing) “as soon as you start to think of friends, family, and acquaintances as potential customers or business partners prepare for all of you loved ones to hate you.” This was in reference to MLM schemes, but it stuck with me. We all have that friend on Facebook or twitter who us wrapped up in doing house party sales presentations or the Ned Ryerson from high school selling insurance. Don’t be that guy!Recognize the conflict of interest. I have said no to a few friends who asked to invest in an idea because I didn’t think they truly understood the risks. If you are going to raise from FFF, try to find high net worth (ie not taking grocery money) people who have experience taking and managing financial risk, either in start ups, their own business, or active equity trading.

20. As a number of folks have mentioned, F & F financing comes with an extra emotional tax.  There is the associated bonus when a deal works.  Having started in the venture business with F & F funded investments alongside my own cash and labor one of the most rewarding days of my life was taking my dad to a roadshow of a company ‘we’ had invested in.  An important item not mentioned is to do a really deep analysis on how much funding is going to be needed to fuel the first stage.  If an idea is not going to work don’t drag it out and dig the family obligation hole deeper.thx for the post, I have passed this advice along numerous times and having it documented with discussion is hugely valuable. 

21. F&F can work out well, but think hard about the family members in particular. Are you going to be comfortable with the family dynamics if you lose $25K of someone’s money and are they going to be able to deal with you, without endlessley reminding you that you failed (if in fact you fail)? I have some family members who are wonderful, others who won’t let you forget they bought you a soda 5 years ago. And it is not necessarily correlated to their net worth.  

22. What is the best way to communicate these expectations because there is so much emotionally going on?

23. There’s a category of F&F called ‘former bosses’. It’s a little weird to call them “F&F” because they are neither and they should be ‘smarter’ money than true F&F and the fact they put into you is a strong endorsement.I’ve got some who are big-swinging-you-know-what’s in their fields. But they definitely invested in ME because I’ve made them money in the past. But they don’t really invest in this sector at all.So the downside is since they’re not connected to the broader angel world and don’t syndicate deals. There is no lead. So as CEO you have a lot of work to do. There are no economies of time.I’d add also that in my journey with fundraising from the Women’s angle is that women very very rarely invest in friends. Guys do it, women don’t. Some is because they don’t have the money. But the ones who have it it’s their husband’s money and putting it into a girlfriend as a high-risk investment is just not gonna happen. Too much potential tension. Women are very tight with investing money. ‘Friends’ is a very low probability path for us.So as an example I had a girls weekend when I started Fundraising and most had no funds and one has a nutty husband which she felt was too entangling. One getting a divorce, one who’s husband just lost his job. One has a hub who’s an entrepreneur too, so they were rounding up their cash for that. Later her husband went on a guys’ weekend and he came back fully subscribed, raised over $1m while skiing, and was ready to parlay that to VCs. My girlfriend’s (his wife) was gobsmacked at how easy the money was and how different it was for a woman. He and his buds have been investing dribs in each other’s stuff for 20 years. (and BTW he is brilliant and all that) Clearly women are partly culpable in this.So to a woman raising F&F I’d say: If you don’t have a family pot of money, go to former bosses first, raise what you can and create a marketable product with that. It better hit market proof points because that’s the only pot of money you can count on.But I think it’s one of the first places people should go.

    1. former bosses are a great source of capitalthanks for raising this topici would encourage every entrepreneur to reach out to former bosses

       1. One of our investors is a former boss!

24. Some super angel action has eaten into this turf. I am not complaining. 

25. Really helpful and definitely applicable to so many startups. Definitely helpful for thinking of ways to support college entrepreneurs that don’t always have the time/scale/resources to pursue larger funding amounts, but still want to pursue their startups.What type of paperwork should accompany a Friends & Family investment? If the startup isn’t incorporated, how should the terms of the investment be written up so that later if the startup becomes incorporated and looks to raise additional seed/angel/Series A funding, the Friends & Family investment is properly accounted for?Thanks for a great article!

26. As someone that’s attempting to create a new startup, what is overall consensus on average costs to get started? I was recommended to self fund for as long as I can, but I’m not sure if that’s the best option. Would having $50k be sufficient until I need to start hiring? I definitely would like to avoid F&F money as that brings in an emotional element to the business.

    1. It all depends on what you are starting, what your existing strengths and skill sets are, and how you are going to get to revenues…and more set factors like location and cost of living can also weigh a lot on resources needed.IMHO…the biggest cost to starting anything these days *should* be your time and energy…do everything you can with just those two resources…and only when you are stretched to your limit there (and have obvious problems that money can help fix) should you start thinking about spending any money…

27. thanks fred.  always love your posts.i’m wondering if you’re seeing an acceleration of friends and family making these investments and if it may be because of companies such as Twitter, Facebook, Zynga staying private so long (where most of their value is now created).   F& F may be seeing these opportunities as their only chance to get in early.   Investing in startups and entrepreneurs is a great thing but an educated crapshoot for sure.probably ot and may be topic of another post but wonder whether these companies (Facebook at 100B, for example) staying private with so few investors (some F & F) and so few employees has some economic impact on the distribution of generational wealth.   Google’s market cap at the close of trading on IPO day was $27 billion and it’s now at $167 billion.    That was the opportunity of a public 6x for astute investors.   Certainly other public opportunities but not many that are as visible as Facebook and the others.

    1. i don’t have any evidence of this. but it would make sense that it ishappening

28. Getting funded is a psychologically interesting concept, because of what it does to an entrepreneurs drive. I know entrepreneurs who are not motivated to get funded, but would be motivated to work hard if they had funding. Family and friends is just one way to get funding, but here are some others that I saw highlighted in a blog post…http://www.caycon.com/blog/…

29. Aside from the moral guilt you might feel from taking/losing money from friends and family, I also believe it can be seriously irresponsible from a business standpoint.When a sophisticated investor gives you money, he is investing in your ability to make tough decisions, take the right risks, and stick to your guns. When your investor also happens to be a close personal friend or family member, your judgment is inevitably clouded. That’s dangerous for a start-up.That being said, if you start gaining real traction you might have some friends or family who really want to support you. In that case, I followed two rules1) Don’t take money from friends or family until you’ve gotten someone else to invest. If you need financing, get some outside validation before you ask family. If you can’t find one single investor to get excited about your idea, it’s either not good enough, or you aren’t very entrepreneurial, and you shouldn’t be asking your family for money2) Make sure they qualify as an accredited investor. There are actually pre-qualified standards the SEC uses to determine if someone can afford to lose money in an investment. If someone really can’t afford to make such a high risk investment, they will definitely cloud your judgment.

30. Love this post.  We are just about to set out doing a friends and family round and we’ve gotten a lot of conflicting advice from both professional investors in the non-tech sphere and founders of tech start-ups.  The convertible note has been brought up as the preferred tool but we are unsure of what it means to place a “cap” on a valuation.  Are we placing a valuation on the company at this time, or is that done in an A round later on (hopefully)?  Also, how do you feel about minimum investment amounts?  We are looking to raise 300K and have about 100K already verbally committed in chunks of 25K so does it make sense to keep 25K as our minimum? 

    1. the cap is the maximum price in the future that the note will convert intoequity at

       1. Would you mind providing an example?Let’s say we raise $100k now from F&F as a convertable note at a 25% discount, what would their investment look like if the next round we raised was $1 million at a $3 million valuation?Thank you again!

          1. their $100k investment would convert to equity at $2.25mm (a 25% discount to$3mm). they would buy 4.25% of the company (100/2350)then they would be diluted 25% by the $1mm investment like everyone else andthey would end up owning 3.2%if the note did not have a 25% discount, then they’d convert with the $1mmand it would be a $1.1mm investment at $3mm valuation. in that scenario,they’d end up with 2.4%so the 25% discount is real value to them

31. “You really don’t want to lose money that friends and family have invested with you.”I don’t think anyone really wants to lose money that _anyone_, F & F or otherwise, has invested in them.  It is certainly emotionally tougher with F & F, but it’s important to respect every dollar invested in you, regardless of the funding source.

    1. Great comment. @charliecrystle:disqus also notes the gravity & seriousness of accepting an investment. Personally, I think it is a great approach & attitude!

32. I’ve won, and … I could not imagine where the money comes. Fortunately, a competitor was interested in the code.ISO Consultants

33. My advice would be not to do it all; that is.., to take an investment from F&F. Traditionally F&F investments in tech start ups tend to be low level sums (£10k-50k = $15k-75K) and if priced at 10% give a very low valuation (£100-£150k pre-money) to a company. On the whole F&F are not professional investors and as such view this more as a loan which they expect you to pay back (and will keep asking you about it!), hence the convertible note would be preferredThere are other options for small cap raises. Credit card, small bank loan, grants etc…, which I would suggest utilising before going down the F&F route. Also many people aren’t aware of the assistance government provides through tax schemes. For example; in the UK you have Working Tax Credit, Housing Benefit as well as the ability to claim tax refunds against previous years’ income to name a few.Often times small cap funding is more to do with “How do I do this for less (free)?” rather than “How do I raise £50k?”In a nutshell; if all you need is £10-50k, then you don’t need to go to F&F for that, and your relationships with F&F will be all the more better off!David

34. I’m in the process of starting up and I’m involved in a family financing deal. My business is unique in that we have one asset, with a high value, that is for sale. It is a patent and we are looking for ways to cover the gap for the next 12 months. Luckily the patent is energy related and qualified for accelerated examination. But the PCT and international filings along with the attorney fees have bent the cash flow.Dave Aykenswww.BlueShiftEngineering.com

35. @fredwilson:disqus – Profounder.com has the statistics about FF. Your guess is correct, FF is indeed the largest source by far and they provide a fantastic platform to help navigate the waters of friends and family (and other pre-existing relationships including customers), investing. I recommend it to all the entrepreneurs out there. 

36. A financing option I am pursuing now is raising money from customers. There are some additional features I’d like to add to Portfolio Armor, and my goal is to raise the money needed to add them via sales of the current version. Making some progress: 

37. I’m very wary to pursue friends and family. I had a friend of mine offer me several thousand dollars because he believes in what we are doing, but it was literally all his savings. There is no way I want that hanging over my head if things go south. It’s a proportion thing – if someone has 500k in the bank and they feel comfortable with $25k that’s a lot different than someone with $25k putting all their chips on the table. I was at the @angellist:twitter  event in Boston a few weeks back at the Bocoup Loft and it was interesting, two of the investors on the panel had differing views of friend & family.  One said they wanted to see your friends and family put in risk, and the other said that was very dangerous. At the end of the day, some people were never meant to be investors. They are too connected to the money and not connected with the reality of the risk. It would almost never be a good idea to take money from someone like that, IMO. 

38. I was under the impression that only “accredited investors” can invest in startups and so it is best to avoid “Friends and Family”. Is my understanding incorrect?

    1. Pretty good discussion of this topic here: http://www.quora.com/In-fri…

39. I probably won’t use the Family and Friend option. Then I won’t have to worry about paying them back right away. Family and Friends usually want to see results an hour after giving you the money.”So, how is the company going? Made any money yet?””When do you think you’re going to pay me back? Next week? Month?””Maybe you should get a 9 to 5 job…then you can pay me back.”The only time getting money from Family and Friends great is if it’s a gift and they don’t expect it back. That’s just my opinion.

40. Fred, any advice on employees as investors?  I was part of a media startup that raised a $6M round (when we only really needed $1.5M — another story) with mostly angels but a sprinkling of friends, family, and employees.  Accredited investors all, but they were still sinking a significant chunk of personal savings into this high risk venture.  Of all of our investor classes, it was the employees who I felt most hesitant about.

    1. i’d stay away from that option

41. Great post, Fred.  The ProFounder team has been talking about this all day – this is, of course, our favorite topic of discussion – and wanted to respond with some add’l info we thought might be helpful to paint a picture of the “friends and family” fundraising landscape.  We’ll build off of your pts below:“I don’t know for sure, but I would suspect that friends and family make up the largest source of funding for entrepreneurs and startups.”  This is absolutely true, and in fact 87% of all funding to private companies in the US comes from friends and family.  (Credit goes to Prof. William Bygraves at Babson University for this statistic.)“It’s tough to know how to price and structure an investment where the investors are close friends or family.”  We agree, and that’s why we created tools on ProFounder to make the task of thinking through and setting appropriate terms a simple, straightforward, and painless process.  A glimpse of our process is here: https://www.profounder.com/…“And friends and family often cannot come up with a lot of capital so unless your business doesn’t need much funding, this will not be the only round you do.”  Most businesses raise $25K-$75K for their initial funding needs, and some won’t raise more than that for a very long time – or, they’ll seek other types of funding once they have more traction, whether bank loans or something else outside of sourcing capital from individual investors.  On ProFounder, the average contribution per investor is around $1500, so the amount is meaningful, and not what some people think of when they think of crowdfunding per se (i.e. that 1000s of people will put in a few bucks each).“I would encourage entrepreneurs who take funding from friends and family to be very clear about the risks and downside.”  We agree, and have found that transparency is the the greatest tool in making sure relationships aren’t damaged along the way.  Being honest about risks up front, and continuing to be honest about both challenges and victories along the way, keeps people in the loop so that they feel included in your journey in the case that things don’t turn out as planned.  Plus, they may actually be able to help along the way if you end up facing challenges with which their experiences or insights could be useful.  Again, we’ve built tools to encourage this pre-, during, and post-raise on ProFounder.“I would recommend doing friends and family financings [sic] as convertible notes with a discount and a cap on the valuation.”  While a convertible note structure definitely has benefits, we think keeping things simple can be extremely helpful when offering an investment opportunity to people who may not have had experience investing in a start-up or small business before.  ProFounder launched with terms based on revenue share over a fixed period of time, and recently launched equity terms as well (non-voting common stock).  We’ve found that the idea of receiving, say, 2% of a company’s revenue for 3 years, or receiving straight equity ownership from the start, resonates with new investors.  We’re also looking forward to launching many other types of structures in coming weeks and months, from convertible debt to preferred equity and more.“Be careful to do it right because there’s a reason why these people will back you when nobody else will.”  We wholeheartedly agree!  A recent ProFounder blog post – here: http://bit.ly/jwTXvI – highlights some of the work done by Del Smith around social capital and the importance of trust in venture creation and development, and the importance of developing both affective and cognitive trust.  Again, we believe a commitment to transparency with your investors is crucial to maintaining this very special level of trust that friends and family uniquely offer. Looking forward to future posts on this topic.

42. I hate when I hear people say,”You need to raise money from friends and family”, or “have you tried raising funds from your friends or family?” News Flash, unlike those that are well off a large majority of minority led startup owners come from poor families and didn’t grow up with a rich family or a wealthy uncle! Thus we are a lot of the times left looking from the outside in or having to just hustle way harder than anyone else just to get a chance to start a company. It will be interesting to see if that changes with the philosophy of early-stage minority lead firms like H360 Capital.

43. good post. Many VCs get irritated when they hear people taking about non-VC financing.

44. Nice to see Profounder join the “peerfunding” via equity space.Having had a lot of experience in this space “friends, family and followers” I thought I would also share our learning’s. Fred, I also always cringe when people flippantly include the word “fools”.ASSOB has been alone in this space for the past 5 years raising over $120 million for over 200 organisations in the SME space from “friends, family and followers”. Followers being a broad term for the many people that are gathered and nurtured during the capital raising process for each individual entity. Some are high net worth individuals and Angels but more often than not they are ordinary people backing something they believe in.ASSOB is very experienced in this space with the average raise at around $600,000 (usually 20 parcels at $30,000) up to one recent raising by a company called Preshafood where $3.2 million was raised by our “Capital Raising Platform”We are fortunate in Australia to have legislation that allows “small scale offerings” by small businesses seeking capital provided the legislation is followed. These are strict rules not dissimilar to the 35 investor regulation in some states of the U.S.A. We have a very sophisticated computer platform to do this efficiently.At all stages of the capital raising process investors including friends, followers and fans of the business need to be treated as equals as the worst thing that can happen is inviting your “friends” into your business as shareholders only to find out when the “smart money” comes in later on they are watered down and their confidence in you and your organisation is destroyed. Transparency, compliance, social proof and credibility are the four main drivers of our capital raising platform other than the process we have that is proven to raise capital.For someone seeking to raise capital we first of all point out to them that it is not just as simple as writing a compliant offer document and loading it up for all to see on our platform (or handing it around to mates). It is a nurturing process of many steps that comprises of three major phases. Gathering followers, nurturing followers and then counting them as investors to ensure no regulations are breached.In addition to this we find there are 5 main drivers that a successful offer needs to have and if it scores a high score on each of these out of 10 then they are well on their way to raising capital:1) Lots of Suitable People to tell the story too2) A Great Story3) A Great Team 4) Great Credibility5) Lots of Compliant Ways and Means to tell the storyAn offer goes through several stages while followers are being gathered.Pending – Information is being gathered via “discovery meetings” and loaded up to the platformPreview – Followers can register their interest and be nurtured awaiting an offer docVIP / Earlybird – A compliant Offer Doc or IM is available for download and investment can startLive – Open to ASSOB’s 19,000 investor base There is a myriad of technology and process behind all this but it works.As over 80% of funding for most businesses comes form this source in the USA then it is best to do the job responsibly that respects all stakeholders as equals. We always have on our Capital Raising Platform a wide mix of companies, flexible capital raising options (e.g. to raise new capital (immediately and/or in the future) to fund growth strategies, to expand their public profile with a range of stakeholders, and/or to facilitate an orderly exit for early stage investors) whilst promoting companies through the latest social media applications, such as ASSOB TV.  ASSOB is rapidly becoming known as one of the most innovative capital-raising platforms in the world.By following ASSOB’s methodology, processes and approach, companies promoted through the ASSOB Platform are taken through the normally complex and frustrating process of capital raising with efficiency and effectiveness.  These companies are also guided in the added responsibilities that come with being a public company, particularly with regard to greater transparency of their activities, enhanced corporate governance standards and the need to comply with the ASSOB Rules.As with the U.S.A. there is to be no public promotion.p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 13.0px ‘Lucida Grande’}

    1. i agree that fools is not appropriate. i think i said so somewhere in thiscomment thread.great comment. very informative. thanks for sharing this info with us.