Monthly Archives: May 2017

How To Raising Startup Money from Friends and Family

For a start-up, initial capital can mean the difference between two founders with just an idea or two founders with a beta product that has real users and could even become the next Uber. While investments from friends and family can be crucial to getting your business off the ground, such investments also come with an additional set of responsibilities. After all, these are the people you grew up with, run into at gatherings, and perhaps even call your father-in-law. Said differently, it is always important to remember you have pre-existing personal relationships with these people that likely trump any need for capital. To that end, below are some important considerations to keep in mind when seeking capital from your friends and family.

1. Be HonestThe great thing about a friends and family round is that these potential investors already know you and have faith in you. They want you to succeed and want to believe that your idea has the potential to make an impactful change. As a founder, however, you should not take advantage of this faith. You should educate these potential investors of the risks associated with investing in start-ups broadly as well as the specific risks unique to your business. Just as important, if you do receive an investment, be sure to provide periodic updates on the status of your business.

2. Explain Investment Terms: Your friends and family may be sophisticated lawyers, doctors, engineers, consultants and so forth, but that doesn’t mean they are sophisticated early-stage investors. Take the time to create a term sheet and lay out exactly what form the investment will take and make sure to explain what that actually means to your potential investors.

While there is a lot of literature on common investment structures for start-ups, like the classic convertible note or the newer SAFE or KISS, your friends and family investors may think they understand the structure when they actually don’t. For instance, an unsophisticated investor may see the interest rate and maturity date associated with a convertible note and think – “Worst case, I’ll get my money back with interest in a couple of years if this doesn’t work out.” The truth is, however, that if the start-up is unable to grow sufficiently before maturity, chances are the investment amount won’t convert into equity because the start-up has failed to raise additional institutional capital, or alternatively, the start-up won’t have sufficient liquidity to pay off the loan.

3. Documentation: A founder should treat an investment from friends and family like an investment from a stranger and should appropriately document the transaction. Documentation does a couple of things: (1) it clearly spells out the intention between the parties and (2) captures the rights and obligations of each party.

4. Offer Fair Terms: Investors in a friends and family round are taking a big risk (if that wasn’t clear from the above) and should be compensated accordingly. As a founder, you should take the time to understand what terms are fair and reasonable given the amount of risk undertaken and offer investment terms that balance such risk. The last thing you want to do is take advantage of your relationship and the trust and offer terms that are less than fair.

Created a Rainy Day Fund

You’ve got your emergency fund set up — three to six months of living expenses set aside for unexpected events — and you’re finally feeling a sense of financial security. But what, exactly, constitutes a financial emergency?

We asked financial advisor Laura Scharr-Bykowsky for tips on when to tap your emergency fund and other advice on saving up for a rainy day.

When Should People Tap Their Emergency Funds?

Emergency funds provide peace of mind when there’s an unusual or catastrophic event in your life. Loss of income due to unemployment or disability is the primary intended use. Your emergency fund can also provide much-needed money if you face a major medical event.

Your fund should be able to cover out-of-pocket deductibles for your health, property and casualty insurance and at least six months of income to cover your expenses during a job search. Keep the money in a cash account insured by the Federal Deposit Insurance Corp.

Does it Ever Make Sense to Use It for a Non-emergency?

Some people may decide to tap this account if they have a large, unexpected maintenance or repair bill such as a new roof or heating and air conditioning unit. Others may raid their account to buy a new car. If you deplete your account in this way, try to build it back up as soon as possible, because you’ll be vulnerable if you have a true emergency. I would recommend this only if you have a stable job and good insurance.

Any Other Savings Tips?

Set up separate savings accounts for different goals and include a line item in your monthly budget to save for these less frequent expenses — for example, one savings account for home repair, one for car replacement and another for at least six months of living expenses.

This method can prevent you from raiding your emergency fund. Setting up separate savings accounts is easy and helps us stay honest with our spending.

Start a Business with No Money

You have a dream but no money to put toward the dream. That’s not uncommon among entrepreneurs. Don’t let the lack of money deter you from a business you know other people would find benefit from. Here are a few ideas of how to get your business off the ground with no money.

1. Some are Easier Than Others

If you don’t have any startup capital, service-based businesses are perfect. Product based businesses require you to purchase and then resell. Service-based businesses like consulting, advising, or things like content creation or web design, only need equipment you probably already have.

2. Get Creative with How You Raise Funds

Consider the story of how Outbox Systems started. The founders had a dream of connecting two software applications together but didn’t have the money to build it. Instead, they worked out a deal with another company where they would build a similar product for a discounted rate yet retain the rights to sell the product to others. That’s creative financing. How can you get creative with how you raise money?

Starting a business is hard. It’s not comfortable. Expect long days, a lot of hard conversations, and plenty of people telling you it won’t work. You don’t have the money to hire people to do tasks like cold calling and door to door sales so you have to take on the task. If you commit to being the person that does just about everything in the beginning, startup costs are much lower.

4. Creative Fundraising – Part 2

Yes, there’s friends and family but today we have crowdfunding, local and national incubators, accelerators, and microfinancing. If you don’t know what these are, do some Googling and learn about them. Look for communities of investors in your area and tell others about your business. There’s plenty of funding that doesn’t involve banks and credit cards.

5. Start Simple

Your dream might include a pretty big business offering a wide variety of products and services but for now, keep it simple. Sell a single product or service. Build your customer base and later branch out into other products and services.

One of the most expensive parts of running a business is acquiring customers. If you gain their trust with one product or service now, selling something else later is much easier.

6. Start as a Hobby

At some point you’ll have to quit your day job but that day isn’t today. Hobby businesses often come from the person’s love of something. Maybe you have a corporate job during the day but you love to bake when you come home. Start with people you know and allow your network to grow from there. Your marketing costs are zero and you still have money coming in from your day job.

7. Work for Somebody Else

Although they may not admit it, most business owners became entrepreneurs thinking they knew more than what they did. In fact, many businesses fail because the person was ill-equipped to build a successful business.

Before you start your own business, work or intern with somebody in the business already. The experience you gain will allow you to start your business knowing what you truly need to spend money on and what you don’t. You’ll also gain insider knowledge of the industry and possibly a healthy customer list from the beginning.

8. Use Free Services

The Internet is full of high quality services you can use for free. Mailchimp is a powerful e-mail marketing platform that’s free for the first 2,000 e-mail addresses. Wufoo allows you to make online forms, and although Facebook and other social media platforms won’t put your ad in front of large amounts of people unless you pay, you can still gain some traction by telling people what you’re doing.

There’s also freelance platforms like Fiverr, Elance, and Upwork that have quality freelancers willing to help with logo and web design, and other service for cheap. You could get a logo made for $5!

9. Barter

Don’t have any money? Offer to barter your services in exchange for somebody else’s. There aren’t many small business owners that aren’t looking for ways to get quality services for little or no cost. What you have, they want, and they’re willing to trade for it.

10. Hustle!

Finally, go into your business endeavor with a hustling mindset. Be ready to do anything legal and ethical to get your business off the ground. Don’t like cold calling? Do it anyway? Not a graphic designer? You can find templates online for just about anything. Don’t want to do any free work? It might be worth it to get your name out there. If you don’t have the money to pay for services, you have to do them or find somebody who can and will do it for free.

Just as you would do just about anything for your family, you have to have the same mindset about your business.