"Son, have you laid the table?"
"Yes Dad, its all there - Calculators, spreadsheets, my attorney..."
To the average Joe, hearing someone's an entrepreneur screams words like ambition, motivation, visionary, restlessness, successful (one hopes) and so on. But what about words like vulnerable, dependent, home-breaker...? Ok, perhaps home-breaker is a little extreme, but its not unheard of as the journalist Meg Hirshberg of Inc.com will tell you. Entrepreneurs often live in financial instability with little or no personal income and therefore demand the support of family and friends, especially at the early stages of business development. In fact, anyone who's started up their own company has gone to friends and family for support at some stage. Offering contacts, advice, housing, emotional support and occasionally finance, friends and family are invaluable resources for entrepreneurs and first-timers in particular. Yet its not something that one should approach lightly. Lending from loved ones can be a double edged sword with alienation, resentment, emotional instability and fragile relationships possibly ensuing.
Building a business requires sacrifice both in your private and business life especially where money's involved. In regards to family life, this may be the carefree family meal or chat on the phone suddenly taking the shape of a board meeting. Are you willing to sacrifice the relationship you hold with your friends and family over your business? Consider for a moment a few hypothetical case studies:
• You're desperate for money. You offer your parents 20% of the business in return for a considerable amount of money. You suggest they sign a minor shareholder agreement but they laugh it off, offended at the suggestion. To your parents, their holding in your company is an asset they want to maximize a return on, with your life coming second. They have their retirement to think of. To you, the business is your livelihood. So two years down the line, when the business is booming and your parents try to force an IPO against your will, your life takes a nasty turn. Their voting rights cause a rift in the company and your relationship. Family meetings now happen only in the presence of attorneys from both sides and both your business and family life are on thin ice...
• The business you and your husband needs financing. Because your mother loves you and trusts in you and your abilities she invests. Down the road, you're in the same position and you don't want to ask your mother for more money knowing her pension is at risk yet your husband asks your mother for more money as its the only possibility he sees. Despite asking her not to, your mother invests. Her business sense is clouded by her love for you and her unwarranted faith in your business. She can't say no but you think she may as well be putting coins into a one-armed bandit. You're tormented by the potential failure. Suddenly there's a fracture between you and your husband and there's mounting tensions surrounding your mother's livelihood. The business falls through, you resent your husband for encouraging your mother to invest so heavily. You mother resents you for putting her in this position and her fortune has been imperiled.
Its hard to deny that debt erodes healthy relationships. My father has told me time and time again never to lend money - "James, don't lend money to your friend. If he needs it that much and you can afford it, give him the money. He won't forget your generosity and most importantly, he won't end up resenting you". Wise words, though not always effective when considering the kind of money involved in setting up a business! Most of the time, we cannot afford to remove our friends and family from the equation. In fact, having a degree of family investment can be essential in securing Venture Capital funding; some VC's will insist on it, knowing that you'll be truly committed to your project, doing everything in your power to prevent the fortunes of your loved ones being imperiled and by default, their investment too.
So how does one avoid falling into the above scenarios?
• If you take from relatives, get them in and out quickly with short-term debt. If you have to give up equity, press for a shareholder agreement. Wherever possible, structure the transaction as a loan rather than equity so valuation doesn't become an issue.
• Work out exactly how much you need from them. Be practically minded about it - can they afford to give it? Can you afford to take it? Think on their behalf as decision making may not be as lucid when family is involved - how will it affect them? Can they comfortably afford to lose the money they invest?
• Don't be lazy about finding all other options available to you. Bank loans? Grants? Seed investment? Business angels? Partnering to cover costs? Sponsorship? Minimize wastage. Cutting unnecessary expenditure and so on...
In the right conditions, family funding can work out - Money is raised. Money is returned with interest. Everyone goes away happy. Be reasonable in what you ask for, don't abuse your loved ones trust and seriously consider the potential outcome of your loan to their finances, your business and your relationship... otherwise you may end up grasping for that calculator instead of your fork at the dinner table or, heaven forbid, your attorney!
Building a business requires sacrifice both in your private and business life especially where money's involved. In regards to family life, this may be the carefree family meal or chat on the phone suddenly taking the shape of a board meeting. Are you willing to sacrifice the relationship you hold with your friends and family over your business? Consider for a moment a few hypothetical case studies:
• You're desperate for money. You offer your parents 20% of the business in return for a considerable amount of money. You suggest they sign a minor shareholder agreement but they laugh it off, offended at the suggestion. To your parents, their holding in your company is an asset they want to maximize a return on, with your life coming second. They have their retirement to think of. To you, the business is your livelihood. So two years down the line, when the business is booming and your parents try to force an IPO against your will, your life takes a nasty turn. Their voting rights cause a rift in the company and your relationship. Family meetings now happen only in the presence of attorneys from both sides and both your business and family life are on thin ice...
• The business you and your husband needs financing. Because your mother loves you and trusts in you and your abilities she invests. Down the road, you're in the same position and you don't want to ask your mother for more money knowing her pension is at risk yet your husband asks your mother for more money as its the only possibility he sees. Despite asking her not to, your mother invests. Her business sense is clouded by her love for you and her unwarranted faith in your business. She can't say no but you think she may as well be putting coins into a one-armed bandit. You're tormented by the potential failure. Suddenly there's a fracture between you and your husband and there's mounting tensions surrounding your mother's livelihood. The business falls through, you resent your husband for encouraging your mother to invest so heavily. You mother resents you for putting her in this position and her fortune has been imperiled.
Its hard to deny that debt erodes healthy relationships. My father has told me time and time again never to lend money - "James, don't lend money to your friend. If he needs it that much and you can afford it, give him the money. He won't forget your generosity and most importantly, he won't end up resenting you". Wise words, though not always effective when considering the kind of money involved in setting up a business! Most of the time, we cannot afford to remove our friends and family from the equation. In fact, having a degree of family investment can be essential in securing Venture Capital funding; some VC's will insist on it, knowing that you'll be truly committed to your project, doing everything in your power to prevent the fortunes of your loved ones being imperiled and by default, their investment too.
So how does one avoid falling into the above scenarios?
• If you take from relatives, get them in and out quickly with short-term debt. If you have to give up equity, press for a shareholder agreement. Wherever possible, structure the transaction as a loan rather than equity so valuation doesn't become an issue.
• Work out exactly how much you need from them. Be practically minded about it - can they afford to give it? Can you afford to take it? Think on their behalf as decision making may not be as lucid when family is involved - how will it affect them? Can they comfortably afford to lose the money they invest?
• Don't be lazy about finding all other options available to you. Bank loans? Grants? Seed investment? Business angels? Partnering to cover costs? Sponsorship? Minimize wastage. Cutting unnecessary expenditure and so on...
In the right conditions, family funding can work out - Money is raised. Money is returned with interest. Everyone goes away happy. Be reasonable in what you ask for, don't abuse your loved ones trust and seriously consider the potential outcome of your loan to their finances, your business and your relationship... otherwise you may end up grasping for that calculator instead of your fork at the dinner table or, heaven forbid, your attorney!
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