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Is Your Family Investing In Your Business? Remember This Important Rule

When your family and friends invest in your startup, don’t just take their money and run!
by Sarah Moriarty | Mar 31 2015
An investor relationship, even with someone close to you, is a two-way street. Keep these rules in mind to ensure that no one regrets helping fund your company.

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Starting a company nowadays is easier than ever before. With so many resources available over the internet, you can go from a seed of an idea to a small team practically overnight if you have enough willpower. But one thing still plagues young entrepreneurs and halts progress more than anything else: money.

Friends and family are often the first to give both an emotional and a financial backbone to young companies when no one else can. In fact, they invest around $50-75 billion in startups every year, compared to $20 billion from angel investors. Since early stage companies aren’t likely to get loans or funding straight out of the gate, friends and family are the lifeblood of many new ideas and ventures.

Unfortunately, the chaos and tumult of starting a business can cause founders to mismanage the investor relationships with those closest to them, and they may not even realize they’re doing it. Here’s the catch about family and friend investments: you should always reciprocate with solid communication from your end. Brian Cohen has some tips in his book What Every Angel Investor Wants You To Know that can help you avoid messy situations with your closest supporters.

What to do: Treat your family and friend investors like angel investors or venture capitalists by keeping them well informed about your business decisions and money allocation.
How to do it: Meet with your familiar investors and get down to some specifics. First, agree upon the conditions of the investment. Some questions to help you get started: Is the money a gift, or an investment with strings attached? Is your family member or friend getting equity in your company? What rights do they have when it comes to information? Second, let everyone involved know how the money will be used—whether it’s for salaries, research and development, or something else.
Why it’s important: Not only will this let your investors know you’ve thought things through, but it will also give them the feeling of satisfaction that they’re making a difference. No one wants to feel like their money is going directly toward paying back a bank loan.

Brian Cohen has plenty of insight on how to keep investors happy in all situations, so check out What Every Angel Investor Wants You To Know in full.

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