- When you start raising money for your company, one of the first types of investors that you'll run into are called friends and family. They're actually often called friends, family, and fools because only fools would invest in very-early stage companies at the beginning. But that's tongue-in-cheek. The friends and family dynamic are people who believe in you and are investing in you to get the business up and running. And that's important because, as a start-up entrepreneur who's raising the first capital for your business, a lot of times the people that are going to be most supportive of you are not necessarily that interested in what you're doing, but they're interested in supporting you.
Now it's important to treat your friends and family in the same way that you would any professional investor in the context of raising money from them. They're supporting you, but you wanta make sure they're getting an appropriate deal for the stage that you're at. And you wanta make sure that what they're investing in is something where in the upside case where things are successful, they're going to make an enormous amount of money. And in the downside case where things don't work out, you won't be embarrassed by the way that you treated them in terms of the context of the investment. Now failure with friends and family can occasionally make for some awkward Thanksgivings; but at the same time, as long as you're being respectful and thoughtful of those early investors, most of your friends and family will be thoughtful and respectful whether or not the company's successful.
There's some magnificent stories of outcomes from these types of friends and family investors. One recent one that made the rounds was Jeff Bezos' parents, who wrote the very first check into Amazon; and the wealth that they have now as a result of what was a relatively small check, hundreds of thousands of dollars, is now measured in the tens of billions of dollars of value for them. So you can have that kind of outcome in the extreme cases from friends and family; but recognize that, in addition to the financial support that you're getting from your friends and family, the emotional support from having them involved early can be very powerful.
And this leads to the final key of it. If you take money from somebody, whether it's friends and family, angel investors, venture investors, or anyone else; make sure you're communicating with them regularly about what you're doing in the business, about the status, good and bad, and especially about places where they can help. When things go wrong or sideways, the worst thing you could do, especially with your friends and family investors, is shut down and not communicate about what's going on. Because you never know when somebody's going to be able to show up and help you in a way that goes well beyond just the money they've invested.
- Exploring potential stakeholders: friends, family, and more
- Finding a venture capital firm
- Breaking down the term sheet
- Taking on debt
- Asking for NDAs
- Accepting a no