Get funded: the friends, family and fools round
3rd October, 2017
When trying to get a new idea off the ground, an inexperienced entrepreneur will turn to those closest to them for help – there’s nothing wrong with that, but there is potential for conflict.
Commonly referred to as the ‘friends, family and fools round’, plenty of businesses have started off with the vital support and even more vital capital that those close to budding entrepreneurs can provide.
This is especially true if you don’t have a track record in the sector you’re targeting or you’re still making a name for yourself.
After all, those closest to you are way more likely to back you than a VC firm or a bank loan manager. They have more visibility on your passion and drive, and they generally want to see you succeed.
However, mixing family, friends, and business can be a potent cocktail with the potential to erode the business and your pre-existing relationships.
If you’re lucky, you’ll be able to secure cash for your business no strings attached – but this is rarely the case.
Instead, it’s more common for family members to want the money paid back or for them to take a stake in the business – and that may include a part in the organisation of the business.
So if someone close to you is playing a pivotal role in setting up your business, how do you avoid it all going to pot?
Structures
According to a family business survey put out by KPMG, the top five causes of conflict are:
- Differences of opinion over future direction surrounding vision, goals and strategy
- Balancing the needs of business versus family
- Lack of communication
- Succession-related issues
- Financial stress
Not everything can be solved with proper business structures and planning, but a lot of disagreements can be avoided.
The best way to make sure that you have some planning and structures around funding is simply to create a document outlining how much the investor has given your company, and when they get it back.
If they want equity in the business or some say over how the business is run, then it’s doubly-important to make sure the terms of these arrangements is on paper.
There are plenty of funding and equity arrangement templates available online, but the best bet is to go to a business advisor or lawyer to get papers drawn up.
While this may cost a bit in the beginning, it’s extra insurance to make sure that everybody is on the same page at the beginning.
If there are disagreements, then it becomes easy to simply refer back to the document as the single source of truth.
Separating business and emotion
Stepping into a lawyer’s office with someone who’s kindly agreed to lend you a bit of cash to get your business off the ground may feel weird – but it’s vital.
Some may even be put off that the favour they’re doing for you is all of a sudden subject of scrutiny from a lawyer.
What was a borderline philanthropic gesture on their part is now in the realm of business, so it’s important to treat it as such.
Some people may bring it up proactively when they agree to lend you money.
However, even it’s ‘no-strings attached’ and they’re simply giving you money out of the kindness of their heart, it’s important to get that down on paper to head off disputes down the line.
The most close-knit families and friends have fallen out over money, after all.
It’s important to be up-front with those lending you money and insist on getting some kind of documentation drawn up – and even more important to point out that it’s for their sake, not yours.
By making it clear that you’re proactively trying to protect them and get everything sorted out on paper, you’ll head off ugly disputes in the future and keep your relationships intact.