The Friends and Family Network
Written by Bobby Jan for Gaebler Ventures
The friend and family network is often the first source of money for entrepreneurs. This article will discuss the advantages and disadvantages of raising money from your friends and family.
Do you have a great business idea and need to raise money?
If you are not ready to turn to professional investors, you could always turn to your friends and family.
The friends and family network, or F&F network, is the first source money many entrepreneurs go to. Usually, the money will come in the form of a low or no interest loan or as an exchange for equity. Raising money from your friends and family tend to be informal and loans tend to be open-ended. You're in luck if you have many friends and family to love you and just want you to succeed.
Advantages of Raising Money from Friends and Family
- It is less complicated. You probably don't need to sign complicated contracts or show them a sophisticated business plan. You don't need to hire an expensive lawyer when you are dealing with friends and family. Usually, all you need is a handshake or a hug.
- It is more flexible. Your father is unlikely to force you into bankruptcy by calling in a loan. Usually, friends and family are understanding and flexible. This flexibility can be very valuable when your business temporary run into trouble.
- You can get cash quickly compared with other sources. Once you convince your friends and family that you have a great business idea, they give some cash right away.
- The F&F network could be a significant pool of capital. Do you have a rich uncle or some other rich relative? Do you have many friends and a large family? The amount of money you could raise from personal relationships could be very significant.
Disadvantages of Raising Money from Friends and Family
- Unstructured terms may cause future problems. Due to the informal nature of raising money from friends and family, you may increase the risk of misunderstandings. To avoid this, make sure your friends and family know how exactly you are going to pay back their money or what they are getting out of helping you.
- You may give out too much equity. Many entrepreneurs, to show their gratitude to friends and family, give out too much equity of their business in exchange for small amounts of money. Don't get carried away.
- You may have unrealistic expectations. Compared to banks and other sources of capital, friends and family tend to be more flexible and supportive. However, do not assume anything and don't test the limits of your relationship.
- You are putting personal relationships at risk. When you raise money from friends and family, you are essentially using your personal relationship as collateral. Avoid a disaster by maintaining communications with your friends and family.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
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Additional Resources for Entrepreneurs
Have you raised money from friends or raised money from family members? If so, how did it turn out? We welcome all comments, questions and suggestions.