Use Financing From Family & Friends to Launch Your Business?

“Launch money” from family and friends is a time-honored source of financing when starting a business.
 
One growing trend for entrepreneurs is to ask their parents for an early inheritance to launch their business. This may actually be an advantageous estate planning strategy for parents with sizable assets.
 
Many fledgling business owners favor a debt-and-equity approach: Family and friend funders become both minority-stake owners and lenders, so their eventual compensation, if any, will be based on both concepts. Just be sure to carefully think through the pros and cons of equity vs. debt: In the short term, it may seem like a huge benefit to take on less debt – but in the long run, what percentage of your company’s success is worth selling?
 
As you’re working through financing with your potential investors, you’ll need to come to a clear agreement about what kind of role they may be taking on in exchange for an equity investment in your company. Will you be ceding any business control? Or will the investment be solely a passive role – and tied to a designated percentage of the business’s profits? You should work closely with your attorney as you consider these issues.

Game Plan

  • As you can imagine, this type of financing has the potential to place a strain on your personal relationships, so consider all the implications.
  • Be sure to talk through the risks associated with investing in a small business with your funders.
  • If you decide to proceed, have a lawyer draft your formal agreements with these investors.
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