Ask the Law Mother: How Do I Raise Money for My Business from Friends and Family?

“Timing, perseverance, and 10 years of trying will eventually make you look like an overnight success.” -Biz Stone, co-founder of Twitter

A great question from Susan in Coppell: “I’m running a personal training business out of my home. While my business has steadily grown over the last few years, in order to really expand, I need to open my own studio and hire additional trainers. I have several wealthy relatives and friends. How do I raise money for my business from friends and family?”

Raising money for your business from friends and family can be easier and less complicated than raising money from outside investors or borrowing money from a bank. You can raise money quickly without having to go through a lot of paperwork. People who know you personally and trust you might not even bother checking your business plans or profit projections.

But raising money from friends has one huge drawback–the potential to damage relationships you treasure if things go south. No one wants to be the pariah at Thanksgiving or at the country club.

How should you raise money from friends and family?

Do your homework

Take the time to write a detailed business plan in language someone who knows nothing about your industry can understand. It doesn’t have to be War and Peace, but it should contain a good explanation of your business, how much money you are trying to raise, your valuation of your business, why you need the money, and what you plan to do with the money.

Take money only from people who can afford to lose it

All of your investors should be “accredited investors.” “Accredited investors” are people who have a net worth of at least $1 million or a yearly salary over $300,000.

Why?

First, they can afford to lose their entire investment if your business fails. Second, having only accredited investors means less paperwork because of laws that allow people with higher net worth to invest with fewer requirements.

Hire a lawyer

A lawyer telling you to hire a lawyer? Imagine that.

If you have outside investors, you will need to comply with federal and state securities laws. What’s securities law? They are laws that govern stocks and other investments in companies where the person making the investment does not participate in management. A lawyer can advise you on securities laws.

Your lawyer can also assist you in writing a detailed written contract, specifying whether the money is a gift, a loan and how it will be repaid, or in exchange for an ownership interest in the business.

You should also strongly encourage your potential investors to seek the advise of their own lawyer and accountant before deciding to invest in your business.

Tell the whole story and hold nothing back

Be truthful with your potential investors. You need to tell them that there is always the possibility they could lose their entire investment. Don’t make promises you can’t keep just to get someone to give you money.

Have you ever invested in a friend’s or a relative’s business? Would you do it again? Leave a comment or send me an e-mail.

Disclaimer: This website is made available for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and the publisher. The website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.