When raising capital for a startup business, the friends-and-family route generally offers the path of least resistance.
Turns out a recession changes everything.
Recently, I sat down with two clients who needed help with their business plans. Though their industries were poles apart (fashion and financial services), they shared a common problem. The friends-and-family well had run dry. In the case of the aspiring fashion entrepreneur, her dad told her he wouldn't give her one dime to start her business until she proved the concept on her own nickel. The financial services entrepreneur had already sunk $150,000 in the business, and his wife insisted that he raise some outside capital before he put any more of the family nest egg at risk.
It may be tough love, but I think the entrepreneurs' families have a point. No matter how much your mom, dad, husband, wife, uncle or sister-in-law may love you, they have a right to know that your startup has a reasonable chance of success before they write that check. And just because they may not be looking for a huge return on their investment doesn't mean they want to see their hard-earned dollars go down the drain.
Here are some things to keep in mind when sitting down at the negotiating table with the family members who provide your bread and butter:
1. Make the business case. No different from any other investors, your loved ones will want to see a solid business plan, not just some scribbling on a napkin. While you probably don't need to show them a complex financial model in Excel, you do need to explain how much money you need to get your business off the ground and what you're going to do with that money to get your business to profitability.
2. Be clear on terms. Never assume that a friends-and-family investment is a gift. Just like any other investment, the money that your loved ones put into your company will take the form of either debt or equity. If it comes in as debt, be sure to specify the interest rate (if any) and the period of time in which the money will be repaid. If the money is put in as equity, make sure your family members know how many shares they'll be getting and at what price and how much control (if any) you're willing to give them over the company's operations. And, of course, be sure to get it all down on paper to avoid any dinner table drama down the road.
3. Don't play the trump card. Don't assume that, just because they've been generous on birthdays and holidays, your family members are going to immediately say "yes" to an investment in your business--especially if they're lawyers, bankers or business owners themselves. Answer their questions patiently, and try not to take it personally if they tell you "no" or ask for additional information. The worst thing you can do is stomp your feet and scream, "But you're my dad!"
At the end of the day, family members love to help each other and chances are that your family will help you fulfill your dream of starting your own business. Make the business case, be clear on terms and resist acting like a bratty teenager, and it's more than likely that Mom and Dad will come through with that big check.