Raising Capital from Friends and Family

Whether you are making plans for a tech startup or another type of startup in the Washington, DC or New York areas, one of your key considerations will need to be raising capital. There are different ways for startups to raise capital, and many startup founders begin the process by accepting investments from friends and family. While it may seem easier to launch your startup with funding from individuals you know and who want to support you in your newest venture, it is also important to consider some of the limitations associated with investments from friends and family as opposed to other forms of debt financing or equity financing.

Raising capital from friends and family can have complications to consider, but it can also be fruitful for launching a startup. Below are some important considerations for startup founders who are in the process of raising capital for a new business venture.

First Rounds of Funding Often Involve Friends and Family

When a startup founder is not going to be engaging in “bootstrap financing,” or providing all of the capital for your startup from their own savings or investments, the first round of financing often comes from friends or family members — in other words, the founder’s personal network of individuals.

According to the US Chamber of Commerce, an initial round of funding that involves contributions from a startup founder’s personal network — or the “friends and family round” — has become increasingly common. It allows the startup founder to avoid the formalities associated with other forms of funding, often allowing the founder to raise capital without providing detailed information about revenue streams or other future elements of the business. Data reported in USA Today suggests that nearly 40 percent of startups begin with a friends and family round.

Pros and Cons of a Friends and Family Round

While you will likely turn to other forms of financing in later rounds, an initial friends and family round can be beneficial but can also have limitations to consider.

As for the benefits of a friends and family round, your personal network is likely to be much more approachable than other sources of funding. In addition, your pitch likely will not need to be as far along, or as refined, as it might need to be in order to secure other forms of funding. Moreover, your friends and family likely want to see you succeed and may be eager for personal reasons to invest in your business and its future success.

At the same time, you should consider the limitations of a friends and family round. If the startup does not succeed and you cannot return their capital, personal relationships can become complicated. In addition, in exchange for capital from friends and family, those individuals will now own equity in your business, which can result in further complications if there are disagreements between you and your investors concerning the direction of the business.

Contact Our Startup Lawyers Serving Washington, DC, Northern Virginia, and New York Today to Discuss Options for Raising Capital 

Before you move forward with a friends and family round, you should discuss your plans for raising capital with one of the startup attorneys serving Northern Virginia, Washington, DC, and New York at Triumph Law. We can answer any questions you have and assist you in determining your options and startup needs.

Source:

uschamber.com/co/run/finance/how-to-raise-funds-through-friends-and-family