How about friends and family financing ?

Quite a bit of discussion took place in the comments and offline following my post on accredited investors, especially as it relates to friends and family financing. These investors will typically be “easier” to convince to support and finance your idea, but at the same time they might not qualify for the accreditation as defined by the law.

So what can you do as a young entrepreneur/team needing some cash? First order: can your savings and credit cards get you anywhere meaningful? Second: in order to avoid being stuck between a rock and a hard place, a loan that will be re-imbursed as opposed to converting into the next round of equity financing might be a temporary solution. Unfortunately for the unaccredited lender, he/she will not be able to benefit from that early support through the perks angels typically get: discount to Series A, warrant coverage, etc. because only accredited investors can acquire equity. And once again, you want to make sure that this is a solution that works legally (for the nth time – I am no lawyer).

Coming back to this set of rules and regulations: they have put in place ages ago to protect investors, and make sure they do not end up involved in highly risky illiquid investments like… financing startups. Not only is this exercise not for the faint of heart – because of the ups and downs startups go through during the initial 2 to 3 years – but probabilistically most of the investments angels will make will end up hitting the wall.

Of course, everyone’s goal is to beat the odds, it just does not always happen. Quite the contrary.


  • Kevin Jones

    There are other people working on how individual small investors, investing outside of the public capital markets, can act on their own interests, yet not, by acting seperately make the transaction cost of their money too high for the entrepreneur. One startup is http://www.microplace.com, which, working with eBay to enable people to invest as little as $100 in a microfinance institution providing micro loans in the developing world. The problem is never the structural banking plumbing, in my experience. It’s figuring out how to make the deal make sense to buyer and seller. I don’t know if Quidstreet will work or not. But i think the relationship of capital to enterprise it is reaching for makes sense in context of current techology and the reality of the waysocial networks can work offline and the way they are starting to work online.

  • http://profile.typekey.com/BasilPeters/ Basil Peters

    As an angel investor, I often see Friends and Family financings that have gone horribly wrong. In every case I can think of, both the entrepreneurs and investors were well intentioned, but nobody involved had the experience to incorporate all of the elements in a successful transaction.
    The most common way entrepreneurs treat their friends and family unfairly is by over-valuation. This causes serious structural problems that must be rectified before the next round of financing.
    The entrepreneurs don’t do this intentionally – it’s most often just a by-product of entrepreneurial enthusiasm.
    I have been working on a series of posts on how entrepreneurs can avoid the pitfalls of Friends and Family financings at http://www.angelblog.net/Startup_Funding_the_Friends_and_Family_Round.html
    I hope this information helps some entrepreneurs maintain good relationships with their friends and family.
    Thanks,
    Basil