If you’re like most people, you have a few regrets when it comes to money. 80% of Americans say they have financial regrets in some form or another, according to a survey conducted by Quicken. But when it comes to borrowing from or lending money to friends and family, the feeling of regret can take on a heavily personal angle.
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In the best scenarios, investing with friends and family is more accessible and can lead to shared success. But there’s a reason why conventional wisdom says not to mix business with family and friends — you run the risk of losing money and relationships at the same time.
Whether you’re considering asking a family member to be the first investor in your startup or thinking about putting money into a friend’s new business venture, weigh the pros and cons carefully before making any decisions.
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What Are the Pros and Cons of Investing With Friends and Family?
Investing with people close to you has its advantages. It’s often quicker and more accessible than working through formal channels. Investment can arise from a single conversation rather than multiple introductions, meetings and pitches. In addition, friends and family will often invest for less equity than venture capital firms may require, leaving you more control over your business.
At the same time, there are numerous drawbacks. For instance, friends and family investment rounds are typically used to raise small amounts of capital, not huge sums of money. It can also put a strain on personal relationships if the business loses money. Furthermore, friends and family might not be able to provide the same level of mentorship and advice that professional investors can offer.
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4 Dos When Investing With Friends and Family
If you do decide to seek investment from friends and family or invest in one of their businesses, follow these guidelines to improve communication and reduce the chances that one of you will regret the decision.
Do Communicate Clearly About Risks
Transparency is the key when dealing with money contributed by people close to you. Ensure that everyone is fully aware of the risks involved. They should be willing to invest with the understanding that they could lose their entire investment.
Do Draft Formal Agreements
Put your conversation into writing by drafting a clear agreement that outlines the terms of the investment, including financial figures, equity stakes and repayment terms. Having a document you can reference for future conversations will protect both parties.