Raising Your First Funds: Friends & Family

As a first-time founder, you’ll likely tap into your closest connections before any professional investors. Raising a friends and family round is often the first outside capital that allows new startups to take those crucial first steps.

This involves raising relatively small amounts of capital from your personal network of friends, family members and acquaintances in exchange for equity ownership in your newborn startup. While you should seed the initial funds yourself, a friends and family round provides a vital injection of cash.

These loved ones are backing you and your vision before you’ve built a product, secured customers or generated revenue. Their investments represent bets on you as a founder – your talents, commitment and ability to translate an idea into a thriving business. Securing their early support and capital is both financially and emotionally motivating.

Instead of selling equity immediately, some founders issue a convertible note or enter into a SAFE (Simple Agreement for Future Equity) round from friends and family first. These short-term debt instruments allow your network to loan money that converts to equity down the road at a discounted price during a future priced seed round.

The key benefit is avoiding setting a formal startup valuation before you’ve made tangible progress. Convertible notes are a form of debt, while SAFE notes represent a future percentage ownership. Both delay the equity calculation until you’ve de-risked the idea.

Along with your close circle, crowdfunding platforms enable you to pitch your startup vision online to tap your larger personal and professional networks for funding. Sites like SeedInvest, WeFunder, StartEngine, and equity crowdfunding portals let you create online investor campaigns to raise from $25,000 up to $5 million or more from anyone interested.

This allows you to not only raise capital from loved ones easily through these platforms, but also reach a much wider audience of potential investors. Friends, family and others can invest as little as $100 or as much as they want in exchange for equity stakes in your new venture.

A higher risk approach is simply borrowing personal loans from friends and family without giving up equity initially. However, this puts vital relationships in jeopardy if you cannot repay the loans as promised. If going this route, make sure to properly document and formalize all loan terms.

To streamline investments from numerous friends and family members, some founders form a limited liability company that pools all their capital into one vehicle. This Friends & Family LLC then makes one combined investment into the startup.

However you raise friends and family capital, keep detailed records, issue proper documentation like convertible notes, SAFE notes or stock certificates, set clear expectations about likely outcomes, and ensure loved ones understand the very real risks of losing their entire investment. Having an established business entity with legal docs is also critical before taking anyone’s money.

While raising funds from loved ones has personal implications, their early backing is often the catalyst that allows your startup dreams to proceed. Giving your closest supporters equity stakes allows them to share in your success from the very first step.