The Parent Trap

The most expensive start-up funds don't come from a bank, an angel, or a venture capitalist. If you really want to pay dearly, borrow from the people who raised you

The decision was so obvious, so natural, so simple. You never gave it a second thought. And now -- as you survey the wreckage of your family, your business, or both -- you wonder how you could have committed such a colossal mistake.

Back then, though, it hadn't looked like a mistake at all. Impatient to get your company going and fed up with bankers demanding double collateral, you found it hard to resist the prospect of tapping Mom and Dad for funds. Unlike the pros, they were easy marks. Due diligence? They watched you grow up. Research? They trust you implicitly. Besides, giving the kids money is an American tradition. The envelope at Christmas, the car at graduation. It's a way of showing love.

Not that they exactly beamed when you finally got the nerve to ask. Their foreheads wrinkled with concern: Why quit your secure, well-paying job? What would you do if your idea didn't pan out?

But it will, you insisted, it will. To be honest, all their hesitation made you a little edgy. "What's the matter?" you finally blurted out. "Don't you love me?"

There, all discussion ceased. "How much do you need?" your father replied. You aimed a little low; you could always return for more. And you did. ("It's just a cash-flow crunch," you would say. And your parents would nod as if they understood.)

As time passed, though, they couldn't help noticing the one-way nature of the transaction. They dropped advice here and there -- "Maybe you ought to go slower," Mom would suggest -- but never came right out and demanded anything. Deep down, you worried that maybe they still thought of you as the irresponsible college kid, perpetually broke and needing to be rescued.

Sooner or later maybe there was an explosion. Or maybe the guilt simply wore you down, draining you and your company of vitality. And now you ask yourself over and over: Couldn't I have lowered my sights and socked away $50,000 myself? Why didn't I try the banks in the next town over?

But those regrets don't help you now. It doesn't even matter whether you've paid the money back. The very act of borrowing has transformed you, your family, and your business. "These loans have strings," says William Borne, who borrowed $100,000 from his parents to finance his contract-nursing services firm, Analytical Medical Enterprises Inc. "It's just that you can't see them."

By the time you do see them, you'll understand why borrowing start-up money from your parents leads to trouble. The reason is as simple as it is startling. And there's nothing you can do to change it.

Because no matter how well-intentioned your parents are, or how willingly they crack open their billfolds, there remains one truth about their involvement: Parents cannot be passive investors.

Your mistake was ever asking them to try.

It's no secret that entrepreneurs lean heavily on parental generosity. John Ward, a professor of management at Loyola University's Graduate School of Business, reports that parents constitute the largest single source of start-up capital in the country. Turning to Mom and Dad for help is a victory of instinct.

It's also, unfortunately, the downfall of many a business. The truth about family lending -- and this all too often is a secret -- is that it doesn't work.

It hardly matters whose fault that is. Parents who lend and children who borrow each nurture interests that are both perfectly reasonable and, from the standpoint of a business, powerfully destructive. There's no way around it: your parents' fiscal involvement will inhibit your ability to manage as you want -- and as your company needs. Worse, your family may be forever fractured in the bargain.

Why does parental lending fail? For reasons that, if you look -- and almost no one ever cares to -- become clear.

Your parents simply know too much. And it's not as if they could separate the entrepreneur from the kid they raised. Nor, for that matter, can you see them strictly as financiers. "If I call my son to question him about my loan, he won't treat me like an investor," complains one parental bankroller. "I'll just be his old man bugging him." In any case, your parents don't invest because they've checked out your idea and found it to be a solid concept with significant growth potential. They invest to show they believe in you.

With such urgent emotional imperatives, all the practical questions look like nit-picking. Is this a loan or an investment? What is a fair repayment schedule? What happens if -- heaven forbid -- the company goes under? Accountants and family-business types will tell you that the only hope of making a loan work lies in being very explicit about the conditions of the deal. Right. Most families can't even come clean about that hurtful comment at the last get-together.

The money you borrow takes on a certain symbolism: It gives substance to all those unspoken and unresolved issues just beneath the surface. Maybe you feel, for example, your parents owe you something for all they put you through as a kid. Maybe they feel guilty for pushing you too hard. Whatever the dynamic, it's likely to emerge only when, say, sales add up more slowly than expected or the bank doesn't kick in as quickly as you promised. To an outside investor you'd say, "Listen, we'll have to renegotiate because things haven't gone as well as I projected."

But if that investor happens to be a parent, stand back. "You let me down," charges the parent. "You don't love me," snaps the child, "and you never did. If you did, you wouldn't care so much about the money." And on it goes, disappointments and hurt feelings -- did anybody really expect hard numbers? -- leading the way. Lending money brings out the deepest, most fundamental fears. "I want my kids to love me for who I am," complain the parents, "and they love me only for my money." Likewise, kids who turn to their parents already feel like failures; if they're not careful, they end up re-creating the dependency they've spent most of their lives trying to avoid. Which is fine, says Thomas Davidow, a psychologist who works with family businesses, "if you don't mind being seven years old for the rest of your life."