Funding a Startup with Friends and Family

Posted on Mar 13, 2012

It’s really easy to find information about raising money from angel investors or VCs, but many people don’t think about another important way to fund a startup: raising money from family and friends. I’ve raised money from friends and family twice, and want to share what I’ve learned — so that you can raise money from your friends and family, and still be able to attend your family reunions. Raising money from friends and family can be easier and less complicated than raising money from professional investors, but is not without drawbacks.  

There are certainly pros and cons to raising money from family and friends, and when it came time to raise money with my first company, I had the choice to raise money via angel investors or from family and friends. We were able to raise six figures fairly quickly from a good group of investors, which helped us stay focused on running our business rather than raising money. Unlike working with an angel or VC groups that would have wanted to get to know us for at least three months, we were able to close our round in about six weeks. And four years later, we raised another round with significant friends and family contributions for Entrustnet, a website that helps people find, access, transfer and delete online accounts when someone dies, in about eight weeks.  

How were we able to raise money quickly? How do you actually approach family and friends about investing in your business? What are some advantages to raising money from friends and family instead of angels? Here are some of the things we did:  

Be prepared. We were able to raise money quickly because we wrote a detailed business plan. We used our preparation and research to get our friends and family to believe in us. Before we asked for anything, we wrote a two-page executive summary of our business that included how much money we were trying to raise, our valuation, how much they would need to invest to own 1 percent of the company, why we needed the money and what we planned to do with the money when they invested. This exercise helped us really key in on how to explain our idea and plans to our family and friends in clear language, free of jargon. It’s important to avoid buzz words and cliches when writing a business plan, but it’s even more important when the intended audience is your family and friends. Friends and family are not professional investors and need you to explain your vision at a very basic level.  

Seek accredited investors. All of our investors had net worth of at least $1 million or a yearly salary of over $300k. Accredited investors helped us in two ways. Since they were high net worth individuals, they could afford to lose their entire investment if we did not succeed, which helped us avoid the mistake of raising money from people who cannot afford to lose it. Having accredited investors also meant less paperwork for us and our legal team because of laws that allow people with higher net worth to invest with fewer requirements.

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