What are the pros and cons of friends and family financing for your startup business?
Friends and family financing rounds are one of the most basic and foundational steps for launching a startup business. However, it can be a very controversial source when doing startup fundraising. Some entrepreneurs don’t even want to consider the idea. Others swear by it as the smartest first step in any venture. So, is it for you? Can you really succeed without it? What are the real advantages and disadvantages?
The 4 W’s Of Friends & Family Fundraising Rounds
Where Does Friends And Family Financing Come Into Play
Even before the Series A, and Seed round of fundraising for startups is the friends and family round.
This is the very first money you’ll get to finance your business idea. Well before going to angel investment groups or VCs or getting on TV shows or being accepted to a startup accelerator program.
What you can’t self-fund, you’ll look for from your personal network of friends and family, and those connections of your cofounders and key team members.
In some cases, they may continue to provide capital at different stages. Though this network is often surpassed by more sophisticated capital as you grow and cross off milestones.
Who Are Your Friends & Family?
This is one of the key components when thinking about pros and cons of friends and family financing. This doesn’t just have to be limited to your immediate family nucleus, or close childhood and student friends.
We all now maintain much larger personal networks than we used to. Partially thanks to social networks like Facebook, Instagram and LinkedIn.
This group can be comprised of lifelong friends, college friends, coworkers, bosses, professors, neighbors, extended family members, and their personal contacts. It also certainly includes any cofounders as well.
What Is Friends & Family Financing?
This can take many shapes and forms. It could be your friends pitching in $10,000 in savings each and using their credit cards to help fund early expenses to start your business. It could be personal loans from mom and dad or your brother in law. It could be capital in exchange for an equity stake from a family friend.
Like many now-famous startups it could be as little as just $1,000. Or it could be hundreds of thousands of dollars.
Taking money from these individuals does not have to make it a family business. They are just helping you get started. It can be directed invested or financed as debt or equity. Or it can be a side agreement separate from the business entity itself.
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