Borrowing from friends and family

- Before there were institutional investors, how did companies get started? Without investment firms, entrepreneurs would often turn to the people already close to them and ask them for money. And still to this day, raising money from friends and family is pretty common early on when starting a company. But borrowing money from friends and family can be tricky. Even the term borrowing is open to interpretation. Do you need to repay that money? How much we need to repay if the company is successful? And with any investment, there are legal agreements to be made. I'm not a lawyer, and this is not legal advice. I recommend working with a registered attorney if you're considering investment. But if you decide that you want to explore receiving funds from friends and family, then it can take three forms: a gift, a loan, and an investment. Receiving a gift is pretty simple, but pretty rare. You're given the money and a repayment is not expected. However, you want to ensure that the giver of those funds truly means them as a gift and understands that you are under no obligation to pay anything back. This is where a formal agreement written or reviewed by a lawyer comes in. But most money from friends and family comes in the form of a loan. A loan is money provided with an intended repayment or repayment with interest. This agreement is between you and the giver, and doesn't provide the giver with ownership in the company itself. The provider is saying, "I'll give you X dollars "and I expect to receive that back, "maybe even with interest." But those terms stay consistent regardless of how well the company performs. The final form of receiving money from friends and family is an equity investment. This works the same way as raising money from any outside investor, and really should involve a lawyer. When you sell ownership in your company, the government views it as offering a security, a tradable financial asset. And according to the law, securities in a private company must be purchased by accredited investors. To be an accredited investor, an individual has to meet a certain criteria for annual income or net worth. That means an individual must have earned more than $200,000 each of the last two years, or have an estimated net worth of over $1 million. It's a pretty high bar and not just any friend or family member is going to exceed it. So if you want to receive an equity investment from friends or family, understand that you'll need to prove that they are accredited or you'll be wasting your time. The last thing I'll say is that you want to really be sure that you want to invite this dynamic into your relationship with your friends and family. They're putting a lot of faith and trust in you, and they'll probably ask you about the business pretty often. If you're not confident that there'll be glad they made this investment, or that you'll do everything you can to be successful, you may want to reconsider asking friends or family for money. Of course, there's a lot of upside too. If the business is successful, your friends and family may be able to share in the success. Ultimately, it's up to you to decide if you're comfortable putting their money at risk when starting your company.