Making your investors happy can always be a tricky task, but the situation can grow even more complex when your investors are your friends and family. Those new to entrepreneurship may not have the experience or opportunities necessary to seek out investments from traditional investors, which means they may turn to their loved ones to help them fund their dreams. While this is certainly a viable solution, it’s not without its risks to your relationships.
To help you avoid any bad feelings should something go awry, nine members of Young Entrepreneur Council each share one piece of advice they’d offer an entrepreneur for how to keep things cordial when the relationship with their family and friends is on the line.
Members pictured from left to right.
Photos courtesy of the individual members.
1. Be Clear About Expectations From The Outset
The best way to keep things cordial with your family and friends when you are also seeking investment from them is to be very clear about your goals and expectations from the outset. You should also be prepared to answer any tough questions they may have about your business. Finally, it is important to remember that you are ultimately responsible for your own success or failure, so don’t put undue pressure on your loved ones to invest in your venture. – Andrew Munro, AffiliateWP
2. Treat The Relationship Objectively
I think the key when dealing with investors who are family or friends is to avoid taking advantage of the empathy that these friendships and family ties often entail. Whether your investors are banks or your brothers, treat the relationship as objectively as possible, and don’t expect greater understanding from friends and family when business isn’t great. Be earnest and show them the hard work you’ve done and continue to do to reward their investments and their continued support through thick and thin. – Kyle Michaud, Carolina Dozer
3. Remain Honest Throughout
Far too many people burn bridges because they mix friends and family with investing. If possible, remember that they are your friends and family first. After all, you can’t put a cost on friendship, so it is better to remain friends rather than investors. To keep things cordial between you and your friends and family, remain honest. Give updates on their investments, no matter how they’re going. If they’re not going well, don’t sugarcoat it, and reassure them that their investments will pay off in the future. Honesty will make them trust you more so that, if the time ever comes again, they will keep investing. – Simon Bacher, Ling App
4. Keep The Lines Of Communication Open
If you respect your business, you must respect your investors, even if they belong to your circle of family or friends. An investor should be treated as an investor first. Period. Mutual love and respect have nothing to do with finances. The most important thing to remember when your investor is also a friend or family member is to keep the lines of communication open. You’ll need to be honest about your plans and expectations and be willing to listen to feedback and criticism. It’s also important to clearly understand the financial arrangement between you and your investor so there are no misunderstandings down the road. Further, you need to be able to have honest conversations about the business and make sure that they are comfortable with the level of risk involved. – Vikas Agrawal, Infobrandz
5. Create A Detailed Plan Or Proposal
It can be challenging to handle finances when your investors are your friends and family members. You may feel like you have to choose between what is best for them and what is best for the business. However, it is essential to remember that you are running a business, and you need to make decisions based on what is best for the company. It is best if you have a detailed plan for how you will use the investment money and how you will pay it back. Thankfully, investing with friends and relatives has another benefit in that they are more patient than professional investors. It’s natural to want to keep agreements informal when working with individuals you know well because you worry that formal paperwork can make things feel less personal, but avoid being careless. – Candice Georgiadis, Digital Day
6. Define Boundaries For ‘Business Talk’
The one piece of advice I would give is to put up boundaries for when business can be discussed. Don’t allow your family or friends to approach you during a holiday gathering to ask about the business. Let them know upfront when they invest that you will be happy to talk to them anytime about such things during the hours when you are working. Other times are set for social activities, and they need to agree to that in the beginning. For those who didn’t do that, pull each of them aside before the holidays and ask them to make an agreement with you to not bring up business when you are visiting for the holidays and to reserve their questions, comments or concerns for times when you are working. – Baruch Labunski, Rank Secure
7. Set Key Performance Indicators
One key piece of advice would be to set key performance indicators (KPIs) for every area of the business. This will ensure that everyone is on the same page and knows what is expected of them. It can also help prevent disagreements about strategic decisions down the road. Another important factor to consider is transparency. Make sure that you are sharing accurate information with your investors and being upfront about any potential challenges or risks that your business may face. Building trust is essential in any relationship, so don’t try to hide anything from your investors. By following these tips, you should be able to maintain healthy relationships with both your family and friends. – Pratik Chaskar, Spectra
8. Get Your Agreements In Writing
A common mistake when seeking investment from friends or family is that people don’t put things in writing, which can lead to unforeseen conflicts and disagreements. It’s best to set terms and conditions that favor and are agreed upon by concerned parties. This is the only way to relay information clearly and set expectations via mutual consensus of the concerned stakeholders. This is something you must do to ensure that your relationships remain intact even when things go south or the investment doesn’t pay off as planned. – Stephanie Wells, Formidable Forms
9. Find Other Sources Of Capital
I never sought investment from friends or family because in bad times you can lose both investors and friends. Investment from friends or family should only occur in the seed stage, and the amount should be less. You should also be very transparent about the risk. Make it clear upfront that even if you lose their investment, you don’t want to lose the relationship. Once you are out of the seed stage, you should look for VCs. Don’t use money from your friends or family. – Piyush Jain, Simpalm