“It’s a bad idea to mix friendship with business.” is the motto that some people live by. Others, on the other hand, love involving their friends with their businesses. In fact, there are some great businesses you can start with friends. Some of these businesses may even benefit from having a friend that is also a partner.
If you’re starting a business, you may be considering asking your friends to join the fun by becoming investors instead of co-founders. It is normal for entrepreneurs to ask their friends to support their businesses. The people in your life may have no problem sharing your business on social media or purchasing from you. However, asking friends and family for monetary investment is something completely different.
But is it a bad idea to go into business with a friend? And if not, what is the right way to ask a friend to invest in your business?
Let’s take a look into the issues that pop up when mixing friends with business.
Is It a Good Idea to Invest With Friends?
Asking a friend to invest in your business is a big risk. There’s a ton that could go wrong, which is why some people outright would never consider this.
Things like: what if your business fails? What if your friend regrets giving you money? What if you’re unable to repay what you owe your friend?
Investing with a friend can risk your friendship if things go wrong. On the other hand, choosing this path with a friend you trust could be a new adventure, one that can literally pay off. But, before you make the request, it’s important to think things through and plan accordingly.
Before you ask a friend for an investment, it’s important to be clear on the kind of help you want. And, you should have a clearly-developed business plan. You should have answers to these questions:
- What kind of business are you starting?
- What kind of product or service will you be providing?
- Where will your business be located?
- Who is your competition?
- Who is your target customer?
- How long will it take for you to become profitable?
- Are there any significant roadblocks to success that you can see right away?
Be honest about all the above answers so a potential investor friend can assess the potential loss of their investment. If your friend loses their money, they will blame you if you have been dishonest with them.
Many people set out to become “business owners” without fully investigating potential problems. This lack of planning increases their probability of becoming in the group of businesses that fail in the first five years. And, while your friends may want to support you, if your business fails due to such an obvious error, they may resent you for this.
Things to Consider Before Asking for an Investment
It’s also important to consider that, even if a person has the means to support your business, friendship doesn’t entitle a person to financial support from others. So, make sure you avoid an attitude of entitlement as you make your request.
It’s also important to explain clearly the kind of help you’re seeking and why.
Don’t be vague and say, “I need money to start a business.”
Be specific and say what the money will be used for. Is it for labor? Do you need money for equipment? Do you need money for a salary for the time being?
Requesting smaller one-time gifts – which have no expectations of repayment – might be a less complicated solution than asking for loans.
Expectations When a Friend Invests in Your Business
When involving a friend with your business, it’s important to be very clear about expectations. Your friend might choose to invest in your business and expect that this earns them the right to be very involved in the day-to-day. Make sure you both have the same expectations. Will your investor be involved in daily operations or be more of a silent partner? Ensure you’re both clear on how much decision-making your investor friend is gaining.
Also, be crystal clear on when you will pay back the money. And, be equally clear on what your investor friend gains. Will she gain shares in the business when it goes public? Will he gain equity? What’s in it for your friend? There must be more than just goodwill, or your friend may begin to feel exploited at some point.
Make a written agreement that you and your friend can refer to in order to avoid resentment or misunderstandings.
Read: 7 Reasons Why Friends Aren’t Supporting Your Business
How Should I Ask My Friend to Invest in My Business?
1. Prepare a Solid Business Plan
Before approaching friends and family for investment, it’s crucial to have a solid business plan. This document should outline your business idea, market analysis, financial projections, and how you plan to use the investment. A well-prepared business plan shows your loved ones that you are serious and committed to making the business work.
It also provides potential investors with the confidence that you’ve thoroughly thought through your business idea and are prepared for the challenges ahead. Remember, investing in a startup is a risk, and your goal is to show that you are minimizing this risk through careful planning and preparation.
2. Be Transparent About the Risk
Transparency is key when involving friends and family in your business. Be upfront about the risks involved. This includes the possibility of losing their investment. It’s important to discuss the crazy nature of running a business. They need to understand all of the potential outcomes, not just the good ones.
This honesty builds trust and also helps set realistic expectations. Encourage them to only invest what they can afford to lose. Even if your friends have the money, don’t oversell them in order to get a bigger investment. Always consider their current financial situation before your financial need. By being transparent, you’re showing respect for their financial well-being and reinforcing the trust they have in you.
3. Offer Formal Investment Options
Treat friends and family as you would any other investor by offering formal investment options. This might include equity in the company, convertible notes, or a simple loan agreement. Clearly outline the terms of the investment, including how and when they can expect a return.
Providing structured investment options not only professionalizes the transaction but also helps protect both parties legally and financially. You may also want to consult with a legal professional to draft any agreements. This will make sure that they are fair and comply with relevant laws and regulations.
4. Communicate Your Vision and Passion
One of your strongest assets when seeking investment from friends and family is your personal connection to them. Use this to your advantage by passionately communicating your vision for the business. Share why you believe in your business idea and how their investment can help achieve this vision.
This step is about connecting emotionally and logically, demonstrating your dedication and the potential impact of their support. Remember, people are more likely to invest in someone they believe in, so let your enthusiasm and confidence shine through.
5. Maintain Open Communication
It’s crucial to set clear expectations from the start. Discuss how you plan to communicate progress and manage the investment. Will you provide regular updates through meetings, emails, or reports? How will decisions be made, and what level of involvement can they expect?
Setting these expectations early helps manage potential conflicts and ensures that everyone is on the same page. Additionally, maintaining open communication throughout the investment period is vital. Keeping your investors informed about both successes and challenges helps build trust and reinforces their decision to support you.
6. Develop a Repayment or Exit Strategy
A crucial step that often goes overlooked when seeking investments from friends and family is the development of a clear repayment or exit strategy. This plan outlines how investors will get their money back, potentially with returns, and under what circumstances. Whether it’s through dividend payments, a share buy-back scheme, or setting conditions for selling the business, having a strategy in place reassures your investors of your intention to honor their contribution.
This strategy should consider various scenarios, including both successful growth and less favorable outcomes. For instance, detail how you plan to manage repayments if the business doesn’t perform as expected. Will there be a grace period, or can the investment convert into a different form of financial support? These details matter greatly in maintaining trust and transparency.
Incorporating a well-thought-out repayment or exit strategy into your investment discussions is not just about safeguarding relationships; it’s about reinforcing the professional and serious nature of the investment. It ensures that everyone involved understands the pathway forward, regardless of the business’s performance, and sets a foundation for mutual respect and understanding throughout the investment period.
Read: How to Announce Your New Business to Family and Friends
When Your Friend Won’t Invest in Your Business
Even if you have a well-prepared business plan and a great business idea, your friend might not say yes to investing in your business. It’s important to remain resilient with your business even if your friend says no to investing into your business.
Preparing for the possibility of your friend saying no is an important step. Would it change the dynamic of your friendship? Would you feel awkward, embarrassed, or resentful if this was the outcome? If your friend gave you unsolicited advice or a harsh critique of your business, would it change your friendship? These are some possible outcomes that should be considered before asking friends for money.
It’s also important to consider that asking friends for an investment is not your only option. You can revisit your business plan, and where appropriate, consider how you might bootstrap your business. This might require focusing only on the most in-demand products or refining your vision for the future. Sometimes, small growth can be the best thing, as it allows a business to become excellent over time.
Conclusion
Asking a friend to financially support your business is a risky move. However, this can be a rewarding process for some friendships. Clarifying expectations and creating written agreements are just a few of the ways that friends who invest together can mitigate these risks and create a strong business partnership.
Also read:
7 Ways to Support Your Friend’s Business
18 Businesses You Can Start with Friends
How to Protect Yourself When Going into Business With Friends
