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Between Friends

Investing in a pal's business doesn't have to compromise your friendship--or your bank account.

This story appears in the June 2007 issue of Entrepreneur. Subscribe »

Even the pros get burned mixing money with friendship. The head of a San Jose, California, venture capital firm says he lost $25,000, not to mention a 10-year friendship, after taking a stake in his friend's startup jewelry store three years ago. The problem, he says, was that nothing was in writing. "Because he was my friend, I didn't feel comfortable going through all the paperwork," says Scott Axelrod, 42 (whose name has been changed here to protect his privacy). "I didn't want to push it."

According to experts, investing in a friend or relative's business is one of the riskiest investment moves. "It's hard to take the emotion out of it," says Sam Sezak, senior associate at New Vantage Group, a venture fund management firm. But with proper planning and the right execution, it's possible to ease risks, make a healthy profit and keep your friendship intact. The key is to approach the investment as purely business.

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