In a recent article entitled “Things to consider before asking friends and family to invest in your venture”, published by TechCrunch, the author Charles Moldow provides the following guidelines to follow when contemplating raising funds from “friends and family”:
- “Not all capital is created equal” – Moldow describes this round as “love money” where investors need to understand the risk of loss of their invested capital at this very early stage.
- “Less is more” – don’t give away too much equity too soon.
- “Don’t ask for money they can’t afford to lose” – this seems like a pretty basic concept, however too often we see an investor who uses funds for this investment that they truly can’t afford to lose.
- “Educate your friends and family on the investment cycle” – make sure your early investors understand that additional financing will most likely be required down the line and what the implications are for their investment stake and potential returns.
As an angel investor, I have experienced many situations where the terms or structure of the “friends and family” round have made additional financings problematic. Oftentimes “friends and family” investors are not financially sophisticated and don’t understand how to value an early stage company or how additional financing rounds will impact their ownership percentage. This article is a must read for anyone contemplating a “friends and family” round and as the author states anyone still wanting to “be invited home for Thanksgiving”!