‘Love capital’ for your startup
Third in a 5-part series about finding money to start your business.
Roger Pierce, Special to QMI Agency
To raise the money you need to launch your business you may decide to ask friends or family members to contribute, and that’s okay. Many entrepreneurs got their start thanks to love capital.
But, please consider these issues before you take any money from the people you care about the most.
• Written agreement
We typically don’t ask people we know very well to sign a legal agreement, preferring to proceed on a ‘handshake’ instead. Big mistake. Prepare a simple letter of agreement to communicate your mutual understanding in terms of repayment, interest, rights, and default. Good paper makes good friends.
• Loan or investment?
There’s a big difference between the two, so you’ll want to be clear about it. A loan is a debt to be repaid by the business or you personally, usually with interest. An investor in your business will typically receive ownership shares in exchange for an agreed price. A lender isn’t entitled to run your business, but a shareholder has a legal say in what you do.
Since you know your benefactor personally and will see them at social occasions (like family celebrations), you may want to establish some boundaries in terms of when and where you both feel it appropriate to talk about your business. For example, you may squirm when your investor uncle asks about your sales quarter while you’re trying to eat your turkey dinner.
• Set a limit.
Loved ones are the easiest source of capital because your lender personally believes in you. They may believe in you so much that they will give until it hurts. It’s irresponsible to accept more money than your loved one can afford to invest or lend. Communicate openly and honestly with each other to discuss reasonable and safe financial limits.
Startup Expert Roger Pierce has launched eleven businesses, co-authored a book and advised thousands of entrepreneurs worldwide. Email email@example.com.