{"id":7299,"date":"2014-06-02T14:00:00","date_gmt":"2014-06-02T18:00:00","guid":{"rendered":"https:\/\/www.wework.com\/creator\/?p=7299"},"modified":"2020-03-30T19:07:24","modified_gmt":"2020-03-30T23:07:24","slug":"let-friends-family-invest-company","status":"publish","type":"post","link":"https:\/\/www.wework.com\/ideas\/professional-development\/let-friends-family-invest-company","title":{"rendered":"Should I let my friends and family invest in my company? It’s complicated"},"content":{"rendered":"

You\u2019ve got a great idea and you\u2019ve put together a great team. All you need now is the seed capital to launch your venture. Do you ask your friends and family to become your first investors? It\u2019s a question with no easy answer and any decision you make will come with a host of both personal and legal ramifications.<\/p>\n

Assuming you value your relationships with your friends and family, before you take a dime from them, you should be sure that everyone understands the risk they will be taking. If it all goes well you could make your early investors wealthy, and everyone will be happy. But the truth is, most start-up ventures are far more likely to fail than they are to succeed.<\/p>\n

Are your friends and family investing money they can afford to lose? If not, you shouldn\u2019t even ask. How would you feel about losing a sizable chunk of your grandmother\u2019s retirement savings? Probably not very good. You should have a frank discussion with your friends and family about the risks of investing in your business and be sure they understand that they may lose all of their investment.<\/p>\n

Even if things go reasonably well after raising money from friends and family, you will probably eventually need to raise additional capital. At that time, your early investors will be faced with a tough choice: invest more capital, which they may not have the means or desire to do, or face dilution at the hands of your new investors. This dilemma can be particularly acute if your new investors are professional investors, like venture capitalists.<\/p>\n

Professional investors are in business to make money, and their assessments regarding how much risk to take, whether and when to sell the company to find liquidity and other matters are very likely to be different than those of your early investors. If you expect that your business will require more than one round of funding make sure you and your seed investors understand that this is the case and how it may impact them.<\/p>\n

If everyone is comfortable with these risks, the next challenge is to make sure that the terms of the investment are clearly memorialized. All too often entrepreneurs accept checks from seed investors without having the terms of the investment properly documented. \u201cHey, we\u2019re all friends here, we can figure it out later.\u201d This approach is almost always a recipe for disaster as future confusion about the exact terms of the investment can sour a relationship between a founder and his investors and can threaten the company\u2019s future financing plans.<\/p>\n

If the investment is a loan, what are the repayment terms, what is the interest rate, is it a convertible loan? If the investment is in equity, is the company issuing common stock or preferred stock? What, if any, rights come with the stock being offered? What does the company\u2019s pre- and post-money capitalization look like? These are all important questions that should be addressed before an early investor\u2019s check is ever cashed.<\/p>\n

Accepting an investment from friends and family members has the potential to not only sour your personal relationships, but it can cause legal headaches as well. Taking an investment from someone who is not an “accredited investor<\/a>\u201d can create legal and business headaches for the company both at the time of the unaccredited investor\u2019s investment and in the future. Any decision to allow unaccredited investors to invest in the company should be carefully considered with legal counsel in advance.<\/p>\n

If your friends and family really want to get involved in your venture, but you are concerned with taking an investment from them, consider whether there are other ways you might get them involved in your business that don\u2019t require them to write a check. Can they serve as an advisor to the company or as an early member of your board of directors? Perhaps they can help with a particular skill or introductions to others in the company\u2019s field that might be useful to your venture.<\/p>\n

While it may be easier to ask your friends and family members to invest in your start-up than it is to go out and convince strangers that you have created a compelling investment opportunity, taking money from those closest to you can often involve a number of potential complications that should be carefully considered before moving forward.<\/p>\n

Attorney Advertising. Prior results do not guarantee a similar outcome. Photos within are not of clients or firm personnel.<\/em>\u00a0\u00a9 2014 Wilmer Cutler Pickering Hale and Dorr LLP.<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"

You\u2019ve got a great idea and you\u2019ve put together a great team. All you need now is the seed capital to launch your venture. Do you ask your friends and family to become your first investors? It\u2019s a question with no easy answer and any decision you make will come with a host of both […]<\/p>\n","protected":false},"author":915,"featured_media":7320,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[43902],"tags":[],"class_list":["post-7299","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-professional-development"],"acf":[],"yoast_head":"\nShould I let my friends and family invest in my company? It's complicated<\/title>\n<meta name=\"description\" content=\"You\u2019ve got a great idea and you\u2019ve put together a great team. 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