Five Funding Sources for Startup: Friends and Family

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"Hey Dad, can I borrow $50,000?"

I know. A single sentence that's so wrong on so many levels.

When we talk about Friends and Family investment, there are a lot of landmines to tiptoe around, and most of them have to do with personal circumstances. So let's look at that opening sentence again. We'll break it down and we'll start stepping on landmines. Together.

Funding is the most complex part of startup. How, when, and why you get funded is an individual series of choices, and every startup will take a different path. No one strategy is better than another, but you should definitely have a strategy in place before you raise a dime.

First of all, most people think of Friends and Family investment as an opportunity reserved for an elite few. This is not the case. You don't have to have wealthy parents or run with a Wall Street crowd to tap Friends and Family money. The fact is, a lot of people, including people you know, invest their money one way or another.

And that's what you're after. This isn't a handout, this is an investment. A sale. The exchange of cash for a piece of your company.

You're not likely to luck into a $50,000 windfall -- those dreams of fully funding your startup via a rich uncle or a friend of a friend of a friend are just that, dreams. With Friends and Family investment, you ideally want to raise just enough cash to get to your first customer.

But even if your family and friends have the means to invest, there's the gross part of having to ask. There's always something sketchy-feeling about asking someone you know for money, no matter how much you believe in your ability to create a return on their investment.

Finally, we're going to have to talk about relationships, and it's going to get sticky. If you've ever borrowed from or lent to a friend or family member, you know that the odds of your relationship changing are pretty high, especially during the time that the loan is active. The same relationship dynamics (the rules and the feelings) apply to investment, and you are beholden to these shareholders regardless of how much blood or water is between you.

So let's get started:


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