Should I raise a family & friends round?

The short answer – yes. The longer lawyerly answer – it depends.

Often our founder clients at Decrypted Law are excited to start a business because they know (or at least believe) that they’ve hit upon a great idea. Paradoxically though, this excitement doesn’t always translate to conversations with others as these same founders get cold feet when considering if they should pursue a friends and family funding round. This is understandable. Startups are inherently risky and by taking money from friends and family, many founders are apprehensive about their startup failing and losing the money of those people who trusted them

In our view this perspective, although reasonable, is also misguided. Friends and family are precisely the investors many founders should target to get a venture going because they provide numerous unique benefits.

First, fundraising is often tied to momentum and FOMO. By human nature, investors like to invest in companies that others have invested in and found desirable. Friends and family raises are an invaluable way of getting the ball rolling so to speak. After a successful raise from friends and family, a startup is positioned to talk to angel and institutional investors about the startup’s success to date raising money and are more likely to gain credibility and even better terms in their conversations.

Second, friends and family are often more willing than typical investors to take on more startup-friendly terms. For example, friends and family may not be as aggressive as institutional investors in asking for special rights or additional discounts in their investments, whereas many friend and family investors are happy to oblige because they’re satisfaction derives in part from helping you pursue your goals.

Third, these people are by definition “friendly” investors. Unlike many other investors who may focus primarily on the bottomline return on their investment and push accordingly, friends and family investors are usually people who want to support you and are therefore more likely willing to listen to your perspective and objectives rather than mostly thinking with their wallets.

Lastly, keep in mind that early stage startup equity can be extremely lucrative for the initial investors. The tremendous risks are offset by exceptionally high upside. As long as your friends and family investors are aware of the startup investing risks and you advise them not to invest more than they can afford, then they are getting access to a type of investment (early stage companies) they wouldn’t otherwise have access to. Remember that by investing in your company, you are also letting them potentially add a unique piece to their investment portfolio, not just helping you make your dreams come true.