If you have decided that the only way to grow your company is to find outside capital, be careful how you raise that money.
Many times I see company owners tempted to ask for money from their friends and family. Whether or not this is a good approach comes down to answering one simple question: How “friendly” are your friends and family?
If you can accept their money and not be uncomfortable showing up for Thanksgiving dinner or the next block party, then friends and family may be the route to go. I have worked with several companies whose owners had a supportive friends and family network that required very little equity and didn’t stress about the financial outlay.
If your friends and family are not that “friendly,” however, consider a loan instead.
Many successful entrepreneurs start their company using a credit card, a home equity line, or by taking a loan against their savings. You may be more successful if you take a loan because:
1. You feel the pressure that comes with making sure it gets paid back.
When you raise money from your friends and family, it isn’t “yours,” and no matter how much you want to pay it back it just doesn’t have the same bite.
2. You are more likely to spend others money frivolously.
When it’s yours, you will be more conservative with how it is spent and it will last longer.
If you do take money from your friends and family, be careful about how much equity you provide in exchange. I have seen two multimillion-dollar deals come very close to falling through because a 1 percent owner–an early friends and family investor–didn’t like the terms and refused to agree.
Deciding to raise money to grow your company from an outside source is not something to take lightly. While the short-term gain is appealing, you must consider the long-term consequences to both you and your business.