10 Ways to Get Funding for Your Swiss Startup. Chapter Two - Friends & Family
Vladimir Nasti?
Breaking barriers, one innovation ?? at a time. ??? Lifelong camper, ?? outdoor explorer, and ???? ??creative soul.
When starting a new venture, seeking funding from friends and family is often the first step for raising capital. This approach is particularly common in the early stages of startup fundraising.
Entrepreneurs frequently turn to their friends and relatives for startup funding before approaching venture capital firms or Investor.
Essentially, friends and family funding can be viewed as a form of crowdfunding. You may gather small amounts of money from multiple relatives or close friends to accumulate a larger sum.
Investors from your personal circle might be inclined to support your business without charging interest. Alternatively, you can create a friends and family investment agreement that includes interest, an equity stake, or other incentives in exchange for their financial support.
Advantages of Friends and Family Funding
Funding from friends and family usually occurs with less formality compared to bank loans, angel investments, or peer-to-peer lending. It allows you to secure capital at an early stage when you may not have a comprehensive business plan or proof of concept, such as initial sales.
Most friends and family investors tend to trust you and your vision, even if your plans are not yet fully fleshed out. This type of funding can enable you to retain complete control over your business, offering an exciting opportunity to embark on a new project with loved ones alongside you.
Disadvantages of Friends and Family Funding
Investment always carries risks, and relying on friends and family can introduce additional pressure. If your venture struggles, you may feel a heightened obligation to repay their investment, causing stress in your relationship.
If your business does not succeed, you risk not only your personal savings but also putting a financial strain on those closest to you. Unlike professional investors who diversify their investments, friends and family may invest solely in your project, leaving them vulnerable if it fails. This can strain relationships and impact your quality of life.
Types of Friends and Family Funding
Although often informal, friends and family investments can be categorized into a few common types, which share features with other funding methods like peer-to-peer lending and angel investing. The two primary types are:
In the case of business loans, you agree to repay the borrowed amount with interest, while equity funding involves giving investors a share of ownership in your business as gratitude for their support.
In the early phases of your business, determining how much to allocate can be challenging. Offering equity can ensure that your investors benefit from future profits, but careful consideration is necessary to avoid giving away too much control too soon.
Business Loans from Family and Friends
Loans from friends and family are a typical method for obtaining early funding, often during the pre-seed or seed stages. Some entrepreneurs may also seek this funding as an emergency resource when facing short-term challenges. While these loans might include interest, many friends and family investors are open to interest-free agreements, motivated solely by a desire to see you succeed.
It's vital for everyone involved to clearly understand the terms of repayment, and documenting these agreements is essential to prevent disputes.
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Equity Funding from Family and Friends
You may choose to offer equity in return for financial support from your loved ones. This option allows you to avoid immediate repayment obligations, as your investors' returns will depend on the future value of the business. However, it involves giving up some control of your company, so it’s crucial to think carefully about how much equity you’re willing to share, especially as you may need to raise more funds from institutional investors later.
Equity investors will have a vested interest in your company, so it's important to have a plan in place for managing their involvement in business decisions.
Repayment Terms and Contracts
Having written agreements regarding repayment terms is advisable, even when trusting your investors implicitly. A friends and family investment agreement serves as a protective measure, clarifying what to do if any issues arise, such as:
Business relationships can sometimes complicate personal connections, so being prepared to handle any challenges professionally is key. Adhering to your repayment schedule and clearly communicating what investors can expect can help mitigate potential problems, ensuring that everyone feels satisfied with their investment.
Here is simple guide to raise money from friends and family without having " uncomfortable conversation" ?
Your end goal should be to identify 10 people who can give you 5lacs each as their initial capital contribution.
Never ask for money from friends or family members who can't afford to lose it!
Financing from friends and relatives is always the quickest to complete, taking only a few months in many cases.
Terms of the Deal
If you do manage to raise money, I would strongly suggest staying away from any equity-based offerings. This will compel you to officially add your baby to your capitalization table, assign a value to it, and comply with securities rules.
A debt instrument, such as a convertible note or a SAFE , is simple to set up, quick to carry through, and provides a reward for these early risk takers.
Make sure everything is appropriately documented. This is crucial for upcoming rounds in addition to being beneficial for business.
Recall the phrase "due diligence"? You'll need to demonstrate to potential investors that you manage your company ethically. You will need an attorney to help you write the proper investment documents for this round.