Running a startup that has been funded by family and friends may seem like the best idea or the worst idea ever. The outcome depends on the business and the person, as well as circumstances beyond your control. It's a decision you have to pay a lot of care and attention to.
The wrong decision could cause the end of your business due to squabbling and a general lack of support.
You may be looking to avoid needing debt relief in a few years if your startup fails, but is the easy option of funding from family and friends really the best idea?
The Type of Business
First of all, you have to decide on the type of business you want to run. It could be a sole proprietorship or a partnership. The main difference between the two is that in a partnership you have to make the decisions alongside someone else. If you are working alone, only you have to make the decisions.
In terms of a partnership, you may have a friend or family member on the board in exchange for their money. Sometimes you may simply take out a loan and run the business by yourself.
Generally, it's always better to run the business by yourself and obtain a loan with favorable terms. This will allow you to make the decisions, rather than having others clouding your judgment. The only exception is if one of your friends or family members has direct business experience. In which case you may want to take advantage of that.
If you do decide to work with someone else, make sure you put down in writing what their roles and responsibilities are.
The Stress of It All
There will always be stress involved when borrowing money from someone you know. To prevent this from happening, you should have a clear loan agreement in writing that details exactly how much you will be expected to pay back and by what date. It will stop any arguments and disputes later, including issues that may end up in court.
When working with someone in a partnership, you need to divide the responsibilities and make it clear who has to take the blame for each part of the company. The blame game can cause a lot of stress and can even destroy a relationship.
The Loss of a Relationship
Whenever you borrow money from family and friends, you have to make it clear over and over again that there's a risk that you could lose everyone's money. A lot of people are surprised when a startup folds and they realize that they may never get anything back.
Either way, there's a real possibility that you could lose your relationship over this. There are many families who have broken up because of a startup gone wrong. If you are unable to accept this risk, you shouldn't ask family or friends to get involved with your business.
When it Goes Right
So far, you may think that asking family and friends to help is the worst idea in the world. These are the risks, but there are many people who have operated businesses like this and have had an incredible amount of success.
As long as everyone is clear about the risks, there's no reason why you shouldn't ask for help. Sometimes you can ease the stress by being completely transparent about the current state of your business. Accept help when offered it. You may be surprised at how wiling those closest to you are to help.
There are other options if you don't wish to involve family and friends. For example, you could decide that you want to attract angel investors or venture capitalists. This process can take months to accomplish, but there's no reason why you can't make it work.
The reality is that your business idea could very well attract outside investments. You may have to pay interest, but it can come with many other perks, such as business mentorship and support along the way.
Take a look at the various startup funding options available to you and see what one works best for your startup.
How will you find your next great business idea?