united-states, investorsWhen starting up a company, some friends and family may express interest in investing. If the company doesn’t need money at that point, but it certainly could help, is it wise to take money from personal acquaintances who also are not accredited investors? Or is there a better way to get them involved? What are the risks in doing so?
If you can survive- however uncomfortably- without funding, then don’t take any funding.
The risks with taking funding is the scrutiny you’ll have to live with while you’re in your development phase. Yes, even your family members will want to know what you’re doing every day or week; when they’re not experienced in start-up development, it can cause headaches, as they might not understand the processes and burdens associated with the development phase. Their emotions might go up and down based on meaningless events in your start-up, and your situation could result in added pressure and drama that will just hinder your start-up’s growth.
There’s another issue: what if your start-up fails? It would be much harder to manage that guilt than, say, if you couldn’t pay back your grant given to you by some rich private equity firm. Even if you don’t feel guilty that the idea you passionately pursued didn’t work out as you expected (which, hey, happens more often than not) it does make an awkward situation to see your family’s net worth slightly down, given that you didn’t really need that money in the first place.
Finally, consider this: taking money from multiple family members might complicate matters if you ever decide to get bigger funding from angel investers. They’d want to know who has an ownership stake, and if terms need to change, then you’ll have to get the OK from all your investors, unless you made them sign a waiver form of some sort beforehand. This could get messy, and the angel investors might think twice in funding a certain project if they suspect ownership structure could be a massive financial and legal issue down the road.
If you’d really like to get them involved, wait until you will actually need money for expansion. At that point, you have a pretty good idea that your business is going to take off, and any investment in the business will more likely than not produce a positive rate of return. Ownership will be better defined, and you could use the help of angel investors to decide how to appriopriate ownership accordingly.
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