‘Friends and family rounds may seem easy at first glance, but there are some things you should consider before trying to raise one. This blog post will discuss what really is friends and family funding round? How do I raise a friend’s and family round? Types of friends and family funding rounds, as well as the advantages and disadvantages of friends and family’s funding round.’
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What Really is Friends and Family Funding Round?
Friends and family funding round is a great way to raise money for your business. Whether you need just a little bit of cash or if you are looking to raise millions, friends and family funding can be an excellent option.
As many business owners know, it is important to have a diverse group of investors or funding sources. This can be difficult to achieve without the help of friends and family who are willing to invest in your company. Friends and family rounds may seem easy at first glance, but there are some things you should consider before trying to raise one.
One great thing about raising money through your personal network is that you already know them, which can make it easier to communicate with each other. Friends and family rounds are typically much smaller than angel or venture capital rounds (and therefore less risky for investors). They may also be willing to invest in your company because they believe in you even if no one else will support their ventures. However, this does not mean that there aren’t risks involved! Raising a friend’s and family round means dealing with emotions like envy, anger, resentment, etc., so choose carefully who you ask for help investing into your business.
Friends and family rounds can be difficult to manage, but it is worth the risk if you think your friends or family members are interested in helping fund your business. You should approach them at times when they will not feel pressure (like after a big win), keep discussions concise (no more than 20 minutes) and try to avoid coming across as desperate for money since this may make people less likely to help. When communicating with potential investors remember that honesty is very important so come clean about any failures of the company – nobody likes surprises!
Why Should You Consider Using The Friends and Family Funding Round?
If you are raising money to start a new business then friends and family can be your best option. They know what you’re trying to achieve, the time commitment that it requires and they understand that things will take longer than expected. This is not like taking out a bank loan where there’s an end date on when the repayment has to happen otherwise interest starts accruing or worse debt collectors come knocking at your door! You should consider friends and family for these reasons:
- They know what you want but more importantly why you want it because friends help friends (true story).
- There is no fixed timeline which means if things go slower than planned they’ll stick with us through thick and thin. When we have bad days they’ll be there to support us and when we have good days they’ll share in our excitement.
- They’re friends, not a bank! In this day and age it’s an advantage as friends know friends better than banks do so you can feel confident that they won’t take out equity on your friendship (also true story).
This is the most personal way of getting startup money into your business – don’t think about anyone else but yourself at this point! If friends believe in what you want to achieve then let them help make it happen otherwise consider other sources like venture capitalists that need lots of return on their investments over time.
In order to help your company grow but without taking too much risk you can seek out financial help from friends and families. You will need them, later on, anyway so why not secure some investments now? The process might be long though since friends and family members will probably want to know more about your business plan before they decide whether or not to invest. They could also simply be friends that you help out financially, so it’s always better if the money is spent responsibly!
Types Of Friends and Family Funding Rounds
There are different types of Friends & Family Rounds:
- Bridge Loan
The bridge loan works well when there’s an impending financing event ahead, like an ICO or IPO. It’s a good way to get cash in the bank immediately, but it does come with some costs. A bridge loan usually comes with high-interest rates because you are borrowing money on an interim basis until your next financing event when more favorable terms will be available. It also gets expensive if there’s not enough time for you to repay or refinance before the term ends.
- Convertible Note
This is one of the most common types of Friends & Family Rounds where friends and family invest in exchange for convertible debt that can later convert into equity at a lower price per share than what they paid for initially upon receiving Series A funding from professional investors like VC funds or angels.
- Bridge Loan with Debt Discount
A bridge loan with a debt discount works in the same way as a regular bridge loan except for one difference: equity investors will pay less per share than what friends & family did because they’ll be getting their money back via future company profits instead of immediately through repayment. This is another form of Friends & Family Rounds where friends and family invest in exchange for debt that can convert into equity at a lower price per share than what they paid for initially upon receiving Series A funding from professional investors like VC funds or angels.
- Friends and family round is the first money that founders raise from close friends or relatives during their early stages of business development.
- The amount raised by this type of funding rounds are usually smaller than other external loans, but it can be difficult to find investors for these types of investments due to lack of regulation in most countries.
- This form of financing is used as temporary solution until more professional investors with bigger capital come along. It is also known as “bridge” loan which allows startups time to develop a product before receiving Series A investment.
- Often times, companies will give friends & family discounts on equity ownership (i.e., they might let them buy shares at $0.20 instead of $0.
What are the Advantages and Disadvantages Of Friends and Family Rounds in Startup Companies?
Advantages Of Friends and Family Funding Round
Friends and family funding rounds offer a number of advantages to entrepreneurs. If you are looking for an investment that can help build your business, then this is worth considering. Friends and family play a major role in these funding rounds, which means they have some very good advantages over other types of investments such as venture capital or angel investors.
- Firstly, there are no fees involved with managing their funds so it saves on costs straight away whereas VC companies will take around 20% equity stake from your company after investing money.
- Also you don’t have to give up any control because most times the friend or family members won’t want anything say just enough to feel included but not interfere with how things work day-to-day.
- Another advantage is that if you are not sure how much money to ask for, then this can be a good way of gauging the market before asking other investors. This is especially useful for businesses who are still working on their business model, as it can give you an idea of what people are willing to invest in your company.
- Friends and family funding rounds bring is speed because these investors tend to be more flexible with the terms than other forms of investments such as angel or VC’s.
- Friends and family rounds are often used as a prelude to other types of investments where companies raise money from friends & family at an increased valuation. A friend or relative might also offer discounts on equity ownership (i.e., they might let them buy shares at $0.20 instead of the standard price of $0.30).
Disadvantages Of Friends and Family Funding Round
It’s really great to be able to get funding from your family and friends, but it does come with some downsides:-
- One of the Disadvantages of friends and family funding round is that you’ll need very deep pockets if they are not sure about their investment in your company. This can make things challenging when raising money after this because investors will know how much support you have behind you already or what kind of returns on their investments they might see back at them immediately.
- If everyone invests a little bit into your startup then there may not be enough room for bigger investors later down the line who believe even more strongly in what you’re doing. It would also take longer to raise larger rounds.
- Another Disadvantage of friends and family funding round is that they will be your first investors so you’ll have to give them a high level of stake in the company. This can become difficult because if things don’t work out later on, it could mean giving up big chunks or even all their investment simply by offering more shares to other people which means less for everyone else already involved or in other words equity dilution .
- Some backers might feel entitled and think he/she deserves special treatment – like invitations for meetings with advisors and mentors etc… But one thing founders should always remember: anyone who invests money wants something back in return at some point. And this includes getting an opportunity to influence how decisions are made about the direction of the company.
Friends and family funding is a tried-and-true way to raise funds for your business, whether you need just a little bit of cash or if you are looking to raise millions. Although it can be attractive because it’s based on personal relationships, this type of financing does come with some risks. Make sure that all parties involved understand the terms before starting any negotiations about the loan repayment plan and interest rate. If you’re still not sure what kind of funding would work best for your company, we’ll help walk through the process together so that everyone has clear expectations from start to finish.