Is Family Money good for your Start-Up? Why or Why Not.
Clients have come to us for assistance when resolving issues involving family money they’ve accepted during the seed stages of their Start-Up. It happens frequently enough that I have asked myself if it’s useful to have family members invest in your Start-Up.
Is Family Money necessary?
In brief, yes, but not necessarily for your Start-Up. According to Fundable.com 38% of Start-Ups use funds from family and friends to get off the ground. Family and friends contribute up to $ 60 Billion per year and it is approximately 3 times the amount Angel Investors or VC firms put up. The average monetary amount is $23,000. That is enough to get the doors open, but not enough to keep them open.
Why you should not take Family Money!
1) Emotional involvement
We all cherish our circle of family and friends on a social level. Unless you grew up in a family business, you have no idea how your family will interreact with you once money is in play. Friendly suggestions all of a sudden have a touch of coercion (perceived or otherwise). Sibling rivalry will raise its ugly head. How difficult is it to say “NO” to your mom and dad once they have invested?
Photo: Guy Stuff Counseling
2) Business spills into family life
You are working 7 days a week and your parents or in-laws invite you to dinner. You already missed your brother’s birthday, so you go. All they want is to see how you are doing and if you are OK. All you want to do is talk about the business, or even better, leave and go back to work. Remember – you are in control of your life. It is now up to you to balance work with family time. If the family has invested in your dream, then the money has a finger on the scale.
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3) Sibling Rivalry
Once your family invests money in your business and if you have siblings, odds are that investment will give rise to sibling issues. Whether it is just the occasional remark, or whether it leads to a Caine and Abel moment, it will sit in your life like an 800 pound gorilla. This is not something you can change, you can only ignore it. You will also need to make sure your actions do not throw fuel on the simmering fire.
4) second guessing
Once you take family money, you are open to constantly being second guessed by well meaning family members. Whether it is about one of your employees, your choice of stationary or location of your office, the second guessing will always be there. To this issue I can tell you that you need to be polite, but you also need to have courage of conviction. It is your company and you are responsible if it fails, not your family members.
5) generational conflict
With rapid changes in today’s business world and social norms, you may find yourself in another situation. Your family thinks they understand what you are doing – but in reality they do not! If the funds have come from either your parents or an older relative, they may have the perception that you are a child. The language they use may irritate you, or their lack of understanding of what you are trying to do will make you impatient. Before you know it you are dealing with having an argument with an investor. You need to remember that it is family you are dealing with. It’s wise to be patient, explain better and do not lose your temper.
photo: Insights for Professionals
If you take Family Money – do this:
If you have no choice but to use family money, there are a few must-do’s that will make the experience easier to deal with. Here are the most important ones:
The paperwork must be in place if you want to avoid trouble in the future. We preach the need for this whether it is for $10,000 or for $ 1 Million and it should be completed before you cash the check. At minimum it spells out how much the investment is, what kind it is, and what the terms are.
Photo: Wilson Law Group
2) clear boundaries
You need to lay down a framework covering the interaction between you and your family regarding business matters. Do they get a Board Seat? Do they get free samples? Can they use your IT person to help with their laptop? etc. This might be boring and a pain in the neck, but the more you spell it out, the better off you will be in the long-run.
3) treat family like outside investors
You took their money and just because they are family does not mean they should be treated like mushrooms. Just as with any outside investor, you need to provide business updates monthly or quarterly. The updates are in writing and have a professional format. No personal emails or SMS. It is all about their money and needs to be professional.
4) Valuation clause
If instead of a loan the family wants shares in your company, you have some additions to your paperwork. You will want a specific numeric way to calculate the value of your company. You want it simple and easy to understand and you do not want an outsider to establish the value. This should be part of the original paperwork.
5) buy-out clause
In addition to having a valuation clause, the paperwork also needs to have a buy-out clause. Why? It protects both the family and you. It sets up a procedure for determining who gets what if the company is sold. It also will protect you if, for example, the investment came from your uncle. If he dies and you now have to deal with his wife, whom you never got along with, the buy-out clause will make the matter less painful.
Family money for your Start-Up can be a blessing or it can be a nightmare. Just as in evaluating a co-founder or partner you will need to do your homework and you will need to do it upfront, before you deposit the check.