Equity Funding: Friends and Family
Given the risk profile of most early-stage tech startups, equity is the most likely (and maybe only) option for raising funds. Debt requires strong cash flows to enable repayment, and previous track record. Grants are for specific projects and often subject to strict requirements.
Equity financing comes in lots of shapes and sizes. Depending on sector, stage of growth and size of fundraise, some will suit you better than others. To learn which might be right for you, read on!
This is the first of a series of blogs to describe all of the common sources of equity funding and we hope you will find it useful.
Friends and Family
We always recommend that you should postpone raising funds for your company as long as possible. This is to ensure that you have developed your business, and its value, as far as you can before you seek investment to minimise dilution (the share of your business that you will be selling for the amount of money you are looking to raise).
When the time comes to raise money for the first time, friends and family is the obvious starting point. They (hopefully) believe in you already, and so require less hard evidence of your potential for success than a total stranger. What they definitely will require however is evidence that you are squeezing the maximum value out of their hard-earned savings. How creative can you be in building and proving the value of your business on a minimal budget?
Use friends and family funding to generate traction and validation for your business model, which will put you in a great position for later stages of investment.
This depends on how wealthy your friends and family are -- generally up to about £100k in a friends and family round.
Can be quick - just a few weeks if you are well prepared and able to persuade your friends and family of the need to move quickly.
Family and friends (or their friends), former colleagues, key business partners.
Investing in startups is really about investing in people you believe in, so friends and family should be the easiest place to start. Hopefully, they can also benefit from EIS or SEIS tax relief which reduces their risk of loss significantly.
Borrowing or raising equity with friends and family can lead to trouble down the line if you aren't successful. Make sure you describe the risks as well as the potential rewards, and that everything is well documented to avoid future disagreements. We say you need to be even more careful that everything is done professionally when dealing with friends and family.
SeedLegals - Great tool for creating the investment documents you need to complete your investment round.
Founder Institute - How to Raise a Friends and Family Round