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KristineS
12-01-2008, 03:39 PM
My Dad recently invested in a company that is run by the son of a former girlfriend. So far it seems to be doing well and seems to have the potential to do very well. So it looks like it will be a good investment.

I'm not sure, were it me, that I would be comfortable with taking money from family and/or friends to start a business. It just seems like the risks would be too great. If the business fails, your investors could lose their money. Relationships could be lost. It just seems like too much stress to me.

Of course the argument could be made that your family members and friends should be responsible and not risk money they can't afford to lose. Still, I know people who have placed trust in family members or long time friends and been shafted, so I know it can happen.

What do you think? Would you take an investment from a family member or friend to start a business?

SteveC
12-01-2008, 04:50 PM
Most businesses start by taking money from:


Friends
Family
Fools


With most people investing fitting into all three categories...

Investing in any business is a risk, however when you add in all of the emotions and personal relationships associated with friends and family... you risk losing everything... your money and your relationship.

Business Attorney
12-01-2008, 05:03 PM
Over the years, many of my clients who have needed to finance their business beyond their own bank accounts have turned to family and friends. In some cases, the businesses have gone bust and the investments have been lost.

Whether the family and friends accepted the loss usually depended on their expectations. The first key is to make sure that any investor, whether he or she is a family member, a friend or an outsider, truly understands the risk of the investment. In a typical offering memorandum given to outside investors, the risks of the business are discussed in great detail. Even though family and friends often invest without formal disclosure documents, it is important that they understand the risks.

A second key area is to make sure that the entrepreneur and the investors mutually understand what is expected of the entrepreneur. I have seen some businesses fail because the person who was the moving force behind the idea failed to execute his concept properly. Sometimes it is simply due to taking one path when another might have been better in hindsight. That happens to the best of managers at times. In other cases, it is because the entrepreneur lacked the skills or discipline to implement the idea. In the latter case, investors do feel "burned" because they rightfully expect that anyone taking their money to fund a business will have the required skills and discipline to put the business plan into effect.

Friends and family are often the best, and some times the only, source of capital for a growing business. Before taking any money from anyone, however, I strongly urge an entrepreneur to be introspective. Asking someone else to sign on to your dream should only be done if you can honestly say that you have a real likelihood of creating a viable and profitable business.

KristineS
12-01-2008, 09:54 PM
David,

Those are some great points.

My concern with taking money from a family member or friend would be that the relationship would be destroyed if things went badly. As Steve C said, it just seems like these sorts of arrangements would add an extra level of stress.

orion_joel
12-02-2008, 12:29 AM
I think that i can see where you are coming from Kristine, the whole idea of borrowing or getting money as an investment from family would not appeal to me, as it does you. I have to much of a conscious, to request money from my family as i know for the most part they could not afford to loose the money if they were to invest or lend it to me. Which although i would like to think i can make a any business i start succeed, i know that there would be some chance of failure in whatever i went into.

Business Attorney
12-02-2008, 12:53 AM
... i know for the most part they could not afford to loose the money if they were to invest or lend it to me.

I usually don't say "never" because there are almost always exceptions, but I will say that an entrepreneur should NEVER accept an investment from anyone who cannot afford to lose the entire investment. That goes not just for family but for everyone. That caveat is on the cover of every private offering memorandum I prepare.

Family is no exception to that rule, although I know that it is often treated that way.

Dan Furman
12-02-2008, 02:02 PM
In other cases, it is because the entrepreneur lacked the skills or discipline to implement the idea. In the latter case, investors do feel "burned" because they rightfully expect that anyone taking their money to fund a business will have the required skills and discipline to put the business plan into effect.

To me, this is the key part. More so than the "afford to lose the money" part (to me, that's a given.)

But if I invest in something, I want to see the person taking the money do everything in his or her power to make it work. I think most people would probably feel similar.

It brings up issues, obviously - if I invest in my brother's business (for example), and his business starts to fail, how should I feel if he takes a vacation? Shouldn't he be trying to make the business succeed instead? What if he's discussing "Dexter" at a party... why is he watching TV when business is crumbling? Heck, why is he even at the party???

It can work, but I think family members/friends have to be very objective with their assessment of the business owner. If the investment comes with even a sliver of "I really hope they know what they are doing", it should not be made.

Evan
12-02-2008, 05:04 PM
SteveC and David seemed to hit it on the nail. I would also add that these investors also invest this money (their highest risk investment) and don't actively manage it. They never check in on the business to see how it is doing and just become passive investors and expect everything is fine and merry. Think of how many people haven't checked their retirement accountants until things were already very sour -- oops -- too late! That's not to say bumps aren't OK, but sharp declines aren't.

While these people may be your friend or family, I believe the investor truly needs to assess whether he believes the business is viable and truly trusts the entrepreneur. And further, what type of success the entrepreneur thinks (s)he can attain. I'd personally want to see a business plan just like they'd give to a bank just to know that they've thought things through and have done some research. If I felt reasonable certain that there are some prospects of this business surviving, I'd invest on the condition they'd inform me of any significant changes in the business. And I'd also be active by trying to make sure my investment didn't flop.

So while some blame can be put on the entrepreneurs for not being able to manage the business -- I blame the investor for not doing his homework. As Einstein said, "Two things are infinite: the universe and human stupidity; and I'm not sure about the universe."

SteveC
12-03-2008, 07:09 PM
Evan you’re spot on, a previous business I helped set-up, attracted finance from one of the other partners’ friends... this person invested a lot of money... (six figures) and they simply gave the company the money and forgot it, they were a non-executive director so had a vote on the board... however they rarely turned up for meetings.

KristineS
12-03-2008, 07:57 PM
I definitely agree that you should never invest money you can't afford to lose, regardless of who is asking you for the investment. I think sometimes people let relationships override their common sense.

mr.ro
12-13-2008, 06:24 PM
This is a tricky subject I should know I got the capital for my company from my dad and it has not gone bad. Granted he didn't care about the money because he could stand to lose it. If it wasn't for that it would have taking me a long time to save for that money but now that I'm on my feet I think he is proud of me for taking this idea a making the money back.

So I would say just don't throw your life savings in it and hope it turns out good because if it doesn't then you both are gonna be in bad shape.

Blessed
12-14-2008, 06:55 AM
I've always been of the opinion that I shouldn't "loan" money to family and friends that I had to have back. Likewise I won't borrow money from family and friends that they really need to depend on. I hate to borrow money for anything but recently we found ourselves in a bit of a pickle and borrowed some money from my Grandmother that we are paying back at a higher interest than she was earning at the bank. If something happened and we were never able to pay her back, she has so much money in the bank that it wouldn't matter. My Dad offered to loan us the money instead - it would have been simpler and he wouldn't have charged us interest but if something happened and we were never able to pay him back it would have been really bad for him right now so we borrowed from my Grandmother instead. I think I'd want to follow the same policy if I was borrowing money to try a business venture!

KristineS
12-14-2008, 04:27 PM
I definitely wouldn't borrow money unless I knew whomever I borrowed from could spare it. I think that's just common sense.

Still, I'm always leery of borrowing from family or friends. It just seems like too much of a minefield. Particularly if you're starting a business.

Blessed
12-14-2008, 06:07 PM
Still, I'm always leery of borrowing from family or friends. It just seems like too much of a minefield. Particularly if you're starting a business.

Exactly! I think a business should be started with capital that you have saved or that you borrow from a bank.

phanio
01-16-2009, 06:00 PM
I say why not. If you are willing to take money from a bank (which is other depositors money - could even be from your friends and family) why not from those close to you and know you best.

If you have doubts, you should not be in business in the first place. Your should protect yourself with a strong written agreement and they should protect themselves with a strong written agreement.

If you keep this part of your relationship very business like, it will be treated very business like by all parties.

If you have concerns about asking for money, talk to them about your concerns as well.

orion_joel
01-17-2009, 12:48 AM
The concept between borrowing from family and borrowing from a bank is quite different.

Say i have an account with ABC bank and my brother goes to ABC bank and borrows money from them. While he may borrow the money that i deposit in that bank, known to me or not, i am not going to be taking any of the risk. The bank takes all the risk. If my brother defaults on that loan and does not pay the money to the bank, i have lost nothing, because it is the bank taking on the responsibility of lending the money. Maybe i would be worried if the bank had all the loans they had defaulting. But in general the money in my account would in no way be linked to the performance of that individual loan.

Whereas if my brother came to me to borrow money and i lent him the money, and he was to stop paying it back. I end up having all kinds of trouble. Even considering that i could get a secure document put together to ensure recourse in the event he stopped paying, if i followed that through there are potentially plenty of further reaching ramifications in a family environment that could lead to problems. Many of which may not have any bearing on a business decision, however they have plenty of swing in your personal relationships. Just saying that you keep this part business is very very rarely going to have any sway after the fact of there being a problem.