“Can You Pass the Turkey … And How Much Money Did We Make Last Month?”

“Can You Pass the Turkey … And How Much Money Did We Make Last Month?” 
The Pitfalls of a Family Member Investor 

Mindy Barker | Barker Associates

Ahhh the holidays are among us again (I have no idea how!). Next week, most of us will gather to give thanks for all that we have, as we sit around a table full of turkey, stuffing, sweet potatoes, gratitude, and laughter. And if you’re an entrepreneur with a family member investor in your business, that table may also be filled with some difficult questions, uncomfortable conversations, and awkward silence. 

As an entrepreneur, starting a new business is about excitement, courage, and dreams on one hand and anxiety, uncertainty, and often, a lack of funds on the other. And when it comes time to getting those funds, some look to their inner circles first. In many instances, it’s the only viable option, and family and friends become the lifeblood of the new venture. In fact, it has been noted that over one-third of startups have raised money from friends and family – to the tune of $60 billion per year. 

Family Member Investors – Some Advantages; Some Pitfalls 

There are, of course, several advantages to having a family member invest in your business. First, he or she knows you personally and is likely investing in you more than your venture. This level of trust and familiarity is something you won’t have with other investors.  

A family member or friend will also likely be more flexible with the terms of the deal (although, as discussed below, there needs to be strict boundaries). They may agree to a lower rate on return, longer repayment terms and a lower interest rate (if debt is part of the deal), and less equity, and/or have fewer overall demands. 

While the above factors can be extremely advantageous to any start-up, issues often arise when the disruptions of an early-stage venture cause entrepreneurs to mismanage these relationships, including overpromising, undervaluing, and lacking communication overall. Additionally, the family member investor may begin to think that they are entitled to everything under the sun, including every piece of information and much more of the money. 

How to Avoid that Uncomfortable Conversation over Turkey 

You’ve decided to move forward with a family member or friend investor. So, what can you do to have a nice Thanksgiving? First, awareness of the potential pitfalls of having those closest to you invest in your business is key. Most of what you can do comes down to communication and keeping them well informed not only about the business decisions you’re making, but also about how you are allocating the money. With that in mind, here are some tips: 

  • Always treat your family member or friend just as you would any other investor.  
  • Provide a well-thought-out and strategic business plan for them to review. 
  • Stay confident, but don’t overpromise. Enthusiasm is great; overpromising is not. They need to understand the risks (hint: put them in writing). 
  • Set boundaries on both sides. Yes, they’re family and friends, but now they’re also investors. There needs to be some boundaries. Remember – keeping them informed does not mean unfettered access to you or your business. 
  • Don’t take money from those who can’t really afford it (even if they want to give it to you). This investment should never come from their life savings or retirement accounts, which will create an enormous amount of pressure on you. The question should be – What can they afford to lose? 
  • Invest yourself. Family and friends (and any investor, for that matter) want to see you have skin in the game.  
  • Don’t take money from family to invest in your business (especially a C Corporation) and then use that money to pay personal expenses.   
  • Set up a meeting to discuss the specific conditions and expectations of the investment. Some questions to consider: 
    • Is the money an investment, a loan, or a gift? 
    • Are they getting equity? If so, how much?  
    • How are you valuing the company? 
    • What rights do they have with regard to decisions and to information? 
    • How is the money going to be used – product development, marketing, salaries? 
  • Clearly agree on everything, and put it in writing (preferably drafted and/or reviewed by attorneys on both sides).  
  • Set regular meetings to keep your investor informed (at intervals decided upon in your agreement). 
  • Keep with the data and the facts. Don’t embellish. 
  • Provide them with all relevant information – they should know about the struggles, just as much as the successes. 

These practices will let your investors know you’ve thought things through, while giving them the satisfaction that they’ve helped make a real difference in your business. But, at the end of the day, before you decide to go down this road, consider if you want your investors asking you questions about business as you carve your turkey next year. 

Barker Associates has extensive experience in investor deals and management. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.  

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