What advice can you give about raising a friends and family round of funding?

Anyone have any specific recommendations they can give for raising a friends and family round of financing? I'm wondering about the usual approach about how much equity to give and what the valuation would be since obviously the business is going to be in an early stage. Any advice is greatly appreciated.


It is a knee jerk reaction from me to ask anyone considering raising funds; Do you really need to?

Keep in mind, that question is coming from a guy who owns a funding platform and built a seven figure professional services business that helps people raise funding.

I can give you plenty of perspective on what a friends and family round looks like - what the pitfalls are - what the advantages are - how to structure the deal - but the first thing I always challenge people to do is tell me why they can't do it without the funding.

Generally people will initially respond with capital expenditures that MUST be made to proceed (buying a building, developing the software, manufacturing their first run of widgets, salary so they can quit their day job). However, they only MUST be made when thinking of the FINAL state of the business - and building it like a house, start to finish, in sequential stages that see ALL the framing done, and ALL the plumbing done, and ALL the finish carpentry done. While this is a perfectly good method for building a house - since you can't really reside in a partially completed one - its a flawed approach to building a business.

You can start with a single small part of the business - or in cases where the final product you want to sell really does require a large capital expense to put into market, use a proxy.

If we return to my housebuilding example - a proxy in that case would be also pitching a tent on the property. It isn't the dream house you want to live in - but it provides some of the benefits and will get you closer to your dream house (you can enjoy the yard!).

In the case of starting a business there is nearly always a similarly useful proxy. Imagine you want to start a company that builds a software to solve accounting issues specific to farm-to-table vendors in a local market setting.

You could start by raising funds and fully developing the software and then doing marketing to uncover effective channels for distribution and then developing your funnel to convert leads produced into sales...

Or, you could start by creating a small consultancy to help that same niche population setup their accounting systems. Or, even smaller - a digital information product like an e-book, online course, or webinar that teaches them some specific best practices for handling their accounting.

This allows you to get started working with your target population much faster, and much more cost effectively - while also forcing you to get in front of real customers and work with them to truly understand the pain that your "dream house" solution will eventually solve at scale. It will ensure that you've gotten the dream right - and avoid building something in the lab that may not stand the test of the real market needs.

Not the answer you were expecting I'll assume - and the offer still stands for advice on the F&F round, but I can never in good faith give people advice about fundraising without first exploring and validating the need.

Answered 8 years ago

You might want to look into convertible notes, I hear they're rather fair and help you dodge that issue until the next round of funding.

They're also pretty much standard for seed funding in SV from what I've read.

I think the whole "skip the valuation" part is a major improvement, so the Business Angels (or your family) only have to answer one question: does this business have a good shot at succeeding ?

Answered 8 years ago

At that stage, its better to receive funding by a convertible note than with equity. Discuss valuation in further rounds when everyone has a better understanding of the value being created. Doing it at such an early stage and with non professional investors creates a huge contingency for future financing.

Answered 8 years ago

My advice would be don't do it. You will lose your friends and family if your are not careful.

I am not trying to sell you on calling me. Really, I am pretty busy with my businesses and consulting. However, I need more info before I could have a greater impact in helping you.

Ask, Ask, Ask, then Ask again.

Here is $10,000 worth of information for free and in a nutshell.

Concentrate on the 3 M's. There are actually 7, but 3 will do for now. These are Market, Message, and Media. They come in that order.

Who is your target market (customer, clients, buyers, users, etc.)?
Tailor your laser focused message for this target market.
What is the best media mix to get your message to that market?

Here's what you do...first, make it an offer that is so incredible that they cannot resist. Secondly, do all the work for them. Make it so easy to make the purchase now that they can do it virtually without effort. Thirdly, give them an incentive to act right now. Fourthly, offer an almost unbelievable guarantee. Fifth, offer a bonus for acting now. There are many other incredible steps, but these steps should help the novice to the professional sell anything.

Whether you are selling B2B or B2C, you have to focus on selling to only one person. You can actually sell to one person at a time while selling to millions at a time. They are one and the same. Don't get off track, what we call digital marketing selling is just selling in print. And that has not changed since Cluade Hopkins wrote "Scientific Advertising." Really long before he wrote the book.

The secret to success: I have had the pleasure of knowing and working with some of the biggest names in business, celebrities, actors, entrepreneurs, business people, and companies from startup to billion dollar operations. The number one reason for their success is doing what they know and love while doing it in new, creative, and innovative ways.

Ask, Ask, Ask. Have thick skin and learn from each "mistake." In a short while, the market will tell you what you need to do and who and what you need to ask. But get started now even if that just means asking a contact on LinkedIn.

While you are thinking, think big and think of something at least 1% better, newer, or different. And being cheaper is not a winning strategy.

Make decisions quickly and change decisions slowly..unless you are actually going off a cliff.

Remember these two 11 letter words...persistence and consistency. They are two of the most important tools ever invented.

Treat everybody you talk to and everybody you meet (including yourself) like each is your number one million dollar customer.

Bootstrap when possible and reasonable. Read "How To Get Rich" by Felix Dennis. Or better yet just remember the camel's nose in the tent story.

However, sometimes you just need to make a deal.

Listen, in any business you have to take some chances and some risks. Make sure you don't need a license and go for it. Remember, timid business people have skinny kids. Paraphrased from Zig Ziglar.

Best of luck,
Take massive action and never give up.

Michael Irvin, MBA, RN

Answered 8 years ago

For some companies, fundraising must happen early on, before the start-up even introduces a viable product in the market. Unfortunately, even more challenging at an early stage to convince traditional investors to join to an initial funding round. For that reason, start-ups seek funding at the earliest stages instead tap into their existing relationships – this stage of fundraising is often called the Friends and Family round. A Friends and Family round typically results in anywhere from $10,000 to $150,000 in funding that allows a start-up to get through its first few months of operation. The Friends and Family round differs from angel rounds in that, as the name states, the funding comes from your friends, family, and connections, instead of from an accredited investor. There are pros and cons to fuelling your start-up with money from the people around you, which is why it is critical to approach the right people and to keep the process highly professional in nature. At a pre-seed level, excluding the bootstrapped companies that have been around for a while, these Friends and Family round start-ups will have little to no revenue prior, and maybe some LOIs from prospective customers. Luckily, friends and family often will not care nearly as much about projected valuations versus the typical accredited investors who really knows the ins and outs of private equity with a more stringent and objective evaluation criteria. In a Friends and Family round there are several ways that those around you can contribute to getting your start-up operational. However, you should never underestimate human nature, and because of this, you still need to produce a formal agreement so that both parties fully understand there will be no outcome for the gift-giver in the event that the business becomes successful. Like gifts, loans are relatively straightforward in a Friends and Family round. By having an agreement in place, you formalize the professional component of the relationship, while preserving your personal relationship with the investor.
In turn, there should be no stressors, or any friends chasing you down for loan repayments, because both parties have agreed to terms beforehand. Equity investments at the Friends and Family stage can be a bit more complicated. It is also important not to dilute the number of shares available, if you plan on seeking formal investors in future rounds. It is typically advised to use a convertible note or convertible equity in these cases when someone is interested in becoming an investor and wants to receive equity in exchange.
As mentioned previously, a start-up at this stage typically has close to zero revenue and is still a seed in the ground. That means your valuation is likely not worth much, and therefore assigning that value towards shares in the company is not logical. A convertible note will allow your Friends and Family investors to purchase shares in the company, typically at a discount, at a rate that is determined later, during the seed or Series A round. The dollar amount gets converted to shares based on what the later-stage investors pay per share, and then the discount is applied to that total amount.
For example, an investor pays a dollar per share in their investment. Regardless of the approach, if your friends and family are planning to invest in exchange for equity, it is your responsibility to detail the risks involved. If there is one key caveat in bringing on investors via early equity shares, it is that the necessity to plan for a cap on equity. These function such that a particular person will invest an initial amount, and if the business hits a specific milestone, the lending party will deposit another pre-determined amount of financing. This is a common approach for some later stage investors, too. As far as developing term sheets, this enters the highly individualized legal territory where you likely want the counsel of a start-up lawyer. Developing term sheets, not just for investors, but also for your staff and cofounders, is a necessary element to future fundraising. This helps to ensure that you do not over-dilute equity. Build a four or six-month plan and determine how much cash it will cost to buy all the needed inventory and assets; plus, any financing you need for early-stage employees. By being very logical with your initial ask, you are in a better position to request additional dollars if the business is still going according to the plan in a few months. Friends and Family investors typically invest in you and your passion more so than they invest in your actual business. Though you can’t outright determine the value of your idea or business, comparing what you are doing in comparison to either competitors or similar markets may also be a useful component in convincing first investors to write the check.
When it comes to equity or convertible notes however, you need to put some more thought into it. Like finding the right investors who will add value in larger rounds, you should determine if these friends and family investors have a professional background, and who really understands the risks and benefits associated with financing your idea. At the very least, narrow your list down to friends or family who have faith that you will succeed, who understand your plans and are clear about the risks.
Do not randomly message your friends from college or high school telling them how you are going to make millions and that they can join in. Investing is as much about relationship building as it is selling your start-up idea on its merits alone. Having already shown you can communicate clearly and demonstrate early traction as well as openness to their advice, your investors will likely see more value in you as an individual founder, and will be more amendable to considering your pre-seed fundraising pitch. In some cases, your investors will outright ask how they can get involved, which will make the process easier. Start-ups too often put policies and formalities on the backburner, which can result in a much bigger mess later. Remember, one of the key elements of a Friends and Family round is that these are people you already have a strong relationship with.
Besides if you do have any questions give me a call:

Answered 4 years ago

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