Should You Let a Friend Invest in or Join Your Business?

In previous discussions with investors and business owners (including?Shark Tank guest Matt Higgins?and?digital agency founder Shay Berman), I’ve touched on whether you should ask your friends for investment and/or hire them to work for you. If you have a big family and friendship circle, it’s a natural decision to make, but is it the right one?

The Cons of Letting a Friend Invest In or Join Your Business

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When you’re young and inexperienced, the idea of launching a business with your friend is exciting. You’re growing together, earning together, and you get to spend all your time together — what could be better than that?

But then reality sets in, the arguments start, the business fails, and your friendship collapses.

It’s one of those things where you insist, “It will never happen to me”. But then it does.

Imagine that you’re working 40 hours a week on your business and another 40 hours on a full-time job. You have kids to care for and chores to run, so you’re sleeping just 3 hours a night. You’re highly strung, fatigued, and burned out.

At the same time, your friend is working just 5 or 10 hours on your business, doesn’t have many other demands on his time, and seems to be treating your company as an ATM.

You’re going to argue. You’re going to fight. You’ll say things that you regret, and at the end of the day, when you leave the office and the tense meetings behind, you can’t just drop by their house for a drink and a movie like you usually do.

This is an extreme example, but variations of this happen all the time in business.

There will always be an imbalance and it will always feel bigger than it actually is. You might feel like your friend is cruising through the week just because they seem happy while you’re constantly stressed. It might feel like they’re not doing anything because they do all their work at home or when you’re not around. Sometimes, they genuinely are doing nothing and don’t care as much as you do.

Businesses can survive that sort of tension, but friendships can’t.

Even if it’s agreed that your friend is just investing their cash and not their time, it can still place a strain on your friendship.

If you lend your friend a couple of hundred bucks because they’re in trouble, and then you see that they’ve just bought a new car, you’re going to feel betrayed. Even if they really were struggling when they borrowed the money, you’ll feel like they could — and should — have done things differently.

If they invest money in your business because you need stock and staff, and then they see you parading a new car on social media, they’ll feel the same betrayal and resentment.

Don’t assume that your friendship is too strong for such issues. If anything, a strong friendship is more reason to avoid letting a friend invest as it could jeopardize everything.

The Pros of?Letting a Friend Invest In or Join Your Business

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Assuming that you and your friend have very similar likes and dislikes, work well together, and have a similar work ethic, starting a business together can be exciting and productive. You’ll have someone to support you and push you to work harder. For inexperienced and nervous founders, that sort of help is invaluable.

Asking a friend for investment also means that you don’t need to go down the traditional route, which can be very difficult and frustrating for unproven business owners. Contrary to what you might have heard, investors won’t throw money at you just because they like you and you have a good idea. If you’re not proven and don’t have the network to put your business in front of investors, you won’t get the funds you need.

That’s where friends can help. They will invest in your business not on merit or experience. They’ll give you the funds you need to launch or grow your business and won’t expect you to pay high-interest rates or hand over a large share of your business.

Before You Ask a Friend to Invest…

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You shouldn’t take money from your friend unless they can afford to lose it. Not only will it strain your relationship more, but it means they will constantly be asking you for that money and will expect more of you and your business. Only ask people who can afford it and only take what they can afford.

It helps to give them an incentive, as well. You’re not a charity and you shouldn’t expect them to give their cash away for nothing.

Offer them a small share of your business in return for their investment or agree to buy them out for an increased sum once the business becomes profitable. You can also offer to pay them back a small sum of money every month and to pay interest on top of those repayments. That way, you won’t feel obligated to make your business profitable quickly and their money will be a loan and not an investment.

Most importantly, put everything in writing. It will protect you and give them some assurances with regard to how much they will own and how much of their money will be returned.

The more professional you make it, the fewer issues you will face further down the line.