Friends and family financing: How to raise money from non-accredited investors

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Friends and family financing: How to raise money from non-accredited investors

September 27, 2019 | Education

A friends and family fundraising round can be vital to the growth of your business. Not only does it help solve the age-old chicken and egg issue (how to get traction without funding, how to get funding without traction), but it also shows future investors that the people around you think you’re a good bet.

What is a friends and family round?

A friends and family round is also sometimes referred to as a pre-seed round. It’s the fundraising you do to get your business off the ground. The people who invest in you at this stage tend to be your immediate network of family and friends, motivated by their regard for you and excitement for your ideas. Typically investment is anywhere from $10,000 – $150,000.

Most of the time, this loan is not made in exchange for investment in your company. A personal loan is easier to structure than equity and it’s not likely that you’ll be paying dividends or selling the business anytime soon.

Learn about other types of funding rounds.

What are the regulations around raising money this way?

Even though this is a less formal fundraising round, you should still comply with Securities laws. If you do decide to sell shares in your company, you should know there are limitations on how you can go about it.

It’s unlikely that the people in your life are accredited investors, unless you’re very lucky. An accredited investor is someone who earned income that exceeded $200,000 (or $300,000 together with their spouse) in each of the prior two years and expects the same for the current year, or has a net worth over $1 million, either alone or together with a spouse (excluding the value of their home).

You can raise up to $5,000,000 from non-accredited investors, but only over the course of your first 12 months of fundraising. You can’t advertise for non-accredited funding, so while it might be a nice idea to throw a pitch event, you can only invite people in your network.

To be safe, you should hire a lawyer. Even if your family and friends tell you it isn’t necessary, it’ll look better for your angel round if you have professional documentation of the fundraising you’ve done. Nothing puts an investor off quicker than messy financial paperwork.

Read more about the laws regarding non-accredited investors.

Isn’t it a very awkward thing to do?

Yep. You might be in for some tough love. Your journey as an entrepreneur will be littered with new and deliciously uncomfortable experiences. But there are ways to make it easier. See below.

How can you succeed?

To protect your most treasured relationships, you need to be sure that you can commit to your business plan, that your projections are realistic and that–despite your great intentions–you aren’t over-promising.

  • Show them you have skin in the game
    You should be able to show your friends and family that you’ve made a personal sacrifice to make this idea come to life. Don’t sink yourself in debt, but do show them that you’ve invested in your business yourself.
  • Choose your investors wisely
    If they don’t understand your goals and vision, or would be impatient for a return, it might not be a good idea to work with them, even if they have the money to invest.
  • Balance formal and informal
    You know the family picnic isn’t the best time to pull out a projector for your pitch deck, but inviting your closest allies to a stark meeting room and hitting them with charts and fluorescent lighting might also be a mistake. At this stage, the trust that your family and friends have in your ability, intuition, and sticktoitiveness is your currency. Pitch at home or in a café, verbally and follow up in writing. Be earnest, be professional, and don’t lose sight of the you they already love.
  • Be clear about the risks
    It’s hard to imagine this thing you’ve worked so hard to bring to life not working out, but any business could be hit with an unpredictable setback. Show them you’ve done all the suitable risk assessment, but remind them that there are no guarantees.
  • Document everything
    Have paperwork for the terms of your agreement, any meetings you have, and write email summaries of your in-person conversations. If your friends and family aren’t used to investing or making personal loans, seeing the repayment plans on paper could be a big comfort.
  • Give them updates
    You’d give other investors scheduled updates on their investment and your business. It’s good practice to do the same for the friends and family.
  • Invite outside checks and balances
    If you’re just starting out, it might be a good idea to find a mentor in your industry. If you were to be pitching an angel, you’d be getting real-time, honest critiques about the viability of your business. You’re less likely to get this from your family and friends. Show them you aren’t working in a vacuum and you’re getting expert feedback.
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