It`s good to be enthusiastic and even confident, but never promise too much. Your friends and family investors should fully understand the risks, including the 90 percent of startups that fail. Also remember that our wealthiest friends and family members are not always the best investors. A smaller investor with the experience or connections you need to grow can help you a lot more. Collecting money from friends and family has several advantages. You are often more inclined to invest in yourself personally, while a larger investor might ask to see a well-established company. You can also avoid the complex compliance requirements associated with other securities sales. Like any loan, a loan for friends and family businesses can contain an interest rate that determines the total amount you repay. Small business loans from family and friends are a common way for them to give you the money you need to start your business. So this is the most difficult time for our friends and family members who don`t care about making an investment decision – and there`s a good chance they`ll end up with a tax loss. Even if you and your investor are comfortable with an informal agreement, it`s important to describe your mutual expectations. Imagine as a marriage contract before marriage.
If you plan for the possibility of something going wrong, it`s less likely that small business losses will turn into large personal losses. In some cases, you might want to offer equity in exchange for financial support to family and friends. The most widely used instruments for early-stage investments are convertible bonds and preferred shares. In our article on Angel Investment Structures, you will find more detailed explanations of these instruments. Don`t make the mistake of having a weak business plan, even if you`re dealing with friends and family. One of the downsides when individuals invest in you and not in your business is that they may not question your business plan to the same extent. While this may seem less work to you, it`s not a good thing. Two of the main types of family and friendly investments are corporate loans and equity financing. You will promise to repay the loan with interest or give your friend or family member a stake in the capital as a thank you for their support. How it works: It could be a gift, a loan, or a stake in the capital of the business. Everyone has advantages and disadvantages, and everyone should be written down, in many cases a legal document.
Venture capital firms are able to verify, evaluate and invest in new and emerging companies. As a result, VCs consider a very high volume of deals and only invest on average in 1 of the 100 deals they are considering – compared to angels who invest in 1 in 10 deals. . . .