When founders recruit friends and family as investors
Is it ever okay to ask for money from your friends or family?
Surprisingly, over one-third of startup founders have raised money from friends and family to get their startup off the ground. Startups receive more than 60 billion dollars per year from these investors. And you know what? That’s greater than angel investors and venture capitalists combined.
As a new entrepreneur, it makes sense that you need help from your friends and family for capital as an alternative to seeking a loan, or any other option available at that time. Raising money from friends and family has numerous advantages. They are the ones who are more willing and comfortable investing in your startup personally. However, everything comes with disadvantages.
What are the friends and family funding round?
Friends and family funding round are when a startup company raises money from its network, instead of seeking professional investors. This type of funding is generally less formal than other types of rounds and the terms and conditions involved are often more flexible.
A startup is often able to raise its first capital through friends and family. These funds can be used to develop a prototype and generate traction so that your startup can potentially attract capital from other sources, such as angel investors and venture capitalists.
What are the benefits of doing a friends and family investment round?
There are many benefits of starting with a friends and family investment round:
· The traditional investment and due diligence process are not necessary if you need money quickly.
· It ensures a strong network of support as you get started.
· You can avoid giving up too much equity in your company so you have greater control over your scale.
What things to avoid at a friends and family investment round?
Don’t make large equity shares at a valuation in the early stages as it makes it difficult for an angel investor to come in at a fair value and fair share in later funding round.
You must provide full disclosure to your investors through a prospectus or some other means so that they can make an informed investment decision.
Asking for too much money from those who cannot afford to lose is like putting pressure on both the investor and the startup.