Family & Friend Funded Startups: Best or Worst Idea Ever?

Starting a business for the first time is both exciting and exhausting because there are many problems that can arise. Getting your dream off of paper and into the starting phases requires a lot of work, a lot of planning and a lot of deciding who you want to be part of your new startup. Friends and family are those that you are supposed to be able to trust, and vice versa. There are both pros and cons of asking those close to you for startup funding. The good, bad and ugly are discussed briefly below by examining a few questions.

What Type of Business Do You Want: Sole Proprietorship or Partnership?

Your new startup may be planned as a sole proprietorship or sole-trader type business, where you make all of the decisions and have complete control over the business. In some instances, especially where funding without obtaining a loan is concerned, a partnership may be a better option. Friends and family could be listed as business partners instead. This will mean that they have a continued financial interest in the company and can help make decisions.

You have to decide if you want sole control and sole financial responsibility, or if you wish for some help to ease the stress of being a new business owner. Making friends and family partners may be a better option to obtain their financial support. In doing so, you should also be clear with their role in the company.

Will it Cause You Stress?

When you ask friends or family for funding, owing them brings upon personal stress that can be physically and mentally exhausting. This can become a nightmare as revenue does not come in as fast as expected to repay their funding. To reduce stress, consider presenting terms to begin repayment after 9 to 12 months in business to ensure that your new startup is sustainable.

This will help ease some of your personal stress and can help prevent a nightmare from occurring. If you are unable to make full payments, speak with those that helped fund your business to make new arrangements. When they see that you are trying, it turns a nightmare situation into a more manageable process.

Can You Handle Losing Relationships?

If everything goes wrong with your startup and you lose everyone’s money, including your own, this sets you up to lose some important relationships. Essentially, you should only borrow or ask those to fund your business that you can live without later. This may seem a bit insensitive, but losing family members and friends from a failed business attempt can take a toll on your mental health for years to come.

This negative is preventable if you start your business off slowly and scale it properly according to growth. Keep your overhead as low as possible to increase the potential for revenue and the repayment of funding.

Will it Boost Your Motivation?

One major advantage of having friends and family as funding sources is that you are more driven to succeed. Their funding shows their support and belief in you as a businessperson. You will work harder, become more creative and be more determined to succeed.

Friends and family may want to be part of your success, and should be offered some opportunity to work in the business or help make some small decisions. It is important to share your successes, and mistakes to keep them informed on the status of how their funding is performing.

Are Angel Investors an Option?

Now, if you wish to avoid all potential scenarios for chaos, lost relationships and personal stress, consider asking friends and family members to be angel investors. Simply put, they would provide funding and not have a say in the business’ dealings in any capacity. You would just be responsible for repayment as agreed, plus interest or a percentage of profits. This may be a better option when you need help from those that know you but you don’t want to lose them as part of your life.

Final Thoughts

Asking friends and family to help fund your startup can be a nightmare, but it can also be one of the best decisions made if your business plan is setup right. You have to start with small goals, meet them and continue to improve your product/service.

Will you be funding your business with the help of your family and friends?