Some entrepreneurs have to fund their idea through external funds from family. However, not everyone buys the idea of asking family members to invest in their ideas for various reasons. But it is not always easy funding your idea on your own, except if you have more than enough capital required to kick start your business.
However, if you must ask your family to invest in your business, do it appropriately. Family members are ready to help if you ask the right way. How do you do this? The simple answer is to get yourself adequately prepared for it, just like a formal event. Get your thoughts together on how much you need, how to convince family members, what you are offering them in return, how to document the process, and a host of others.
Decide How Much You Need
Before seeking investment from family members, you need to properly estimate how much you need. While doing your estimate, don’t try to limit cost. Ask for enough money you need to start a business. Inadequate startup capital is a major reason why some businesses don’t survive the initial stage. You don’t want to make this mistake. Also, devise a strategy that works best—whether to ask a large amount of money from a few investors or small amounts from many. If you have a very large family, get a small amount of money from many who may work for you. You’re less likely to ruin a relationship over $500 or less.
Decide What You Want: Debt or Equity
People can invest money in your business by lending you money that creates a debt or buying a portion of the company, which gives them equity. Most entrepreneurs finance their business with any or both of the two financing options.
Debt implies that a person lends money to your company and you agree to pay it back. You are expected to compensate them with interest for the risk when paying back. Typically, you will be personally liable for the loan if the company goes out of business.
Conversely, people can invest in your business by purchasing equity. This gives them a piece of your company, making them your partner. This also implies that you do not need to pay them back for the money that they provided. However, they will be able to share the company profits and have a say in how the company is managed. Such investors lose their investment if your company goes out of business.
This is the first step to take before going forward to your family members for a loan. So, you know what you want, not what they want.
Have a Solid Business Plan
When it comes to financing a business idea, families switch off from emotion to logic. So, you have to be adequately prepared for the big talk like it is a formal meeting. A significant step to take is to take your time to draw up a feasible, detailed, and convincing business plan. Just as you won’t get a bank loan without a realistic and persuasive business plan, you may not get investment from your family too. See your family members as bankers or venture capitalists in this situation. Make the business plan as professional as possible; it is the first chance you have to convince your family members you understand the business and market inside and out. Investing with you won’t be a bad decision. Your business plan should contain your financials, metrics, and milestones that vividly paint a picture of how you intend to make your venture profitable.
Explain the Risk
You have to be open and honest about the risk involved when pitching your business idea. Family members may not want to invest in a “perfect” business idea because they know there is no perfect business idea anywhere. Every business comes with its unique risk. Don’t pitch a business idea that is “too good to be true.”
Inform your family members about the risk involved in the business plans. Outline the best and the worst-case scenario and the strategies you have devised to mitigate the risk. Allow them to weigh their options before deciding. Doing this could earn you more financial support from family members than you envision.
Educate Your Investors on the Terms
Whether the investment you’re soliciting from your family members is debt or equity, you need to properly draw out the terms for repayment of the loan or the percentage of profit equity holders get. Provide an elaborate explanation of what it means to own 5% of a company, sell their share, how they can have a say in the company’s management, and more. Likewise, if you will be taking a loan, you should also fashion out a concrete plan to pay it back and when to pay back. Also, inform your family members about the repayment plan.
These are very important details that could derail any healthy investor relationship if not well stated or honored, even worse for family investors.
Properly Documents the Activities
It is important to reemphasize that activities involved in meeting with your family members regarding seeking investment should take a business approach. You might be tempted to want to be informal in your dealing, but keep the communications business-like. And properly document every agreement reached in your discussion with family members. Documents how your debt and when you will be paying it back. If you are taking equity, then you should involve a lawyer. This will allow you to effectively manage investment and give your family members some level of assurance about their investment.
Setup Communication Plan To Manage Expectations
It is normal for family members who have invested in your business to know how your business is faring. But if you don’t set up measures to regularly update them about how business is going, you might find their inquiries disturbing. You don’t want your grandma or uncle calling you every Saturday night and asking how the business is going. Set the expectation that you will send out a report every two weeks or monthly. Unless it’s urgent, you will stick to that schedule.
Finally, after considering all the tips mentioned above, it is expedient to state that you have to preserve the relationship between you and your family, irrespective of the outcome of the meeting. If you get investment from them as expected, try to honor your part of the agreement. And if they choose not to invest with you, take it calmly, stay positive and think of other finance alternatives.
Have any more tips for asking family to help fund your startup? Let us know down in the comments.
This article originally published on GREY Journal.