Asking your friends and family to invest in your business is fraught with the potential for melodrama.
Unlike the kind of analysis that comes with a bank loan, when you borrow money from your loved ones, you invite a special kind of scrutiny. Suddenly, your dad has license to question whether or not you really needed that new desk lamp, and your doting grandmother might wonder aloud why you turned her nest egg into a third website redesign.
Still, the fact that founders so routinely turn to friends and family loans — despite the messy strings and relationship complications — is testament to their value. No one will give you more money, on better terms, with less requirement of proof than your family.
To make the conversation a little easier, Business Insider spoke with a number of founders who have successfully raised friends and family funding. Below is a list of the most pressing considerations to bear in mind when pitching your loved ones, as well as a script that any entrepreneur can use for seed-stage fundraising.
Acknowledge the risk of their investment
One of the main reasons founders turn to friends and family financing is because, generally, the money comes with very few strings attached; your armchair investors are either getting equity (a percentage of ownership in the company) or the promise of a recouped payment — if the young company is an eventual success.
These kinds of lending conditions are extremely favorable to the founder, which is why so many entrepreneurs turn to friends and family financing first.
However, the vast majority of startups fail within seven years, meaning most friends and family rounds are financing companies that will eventually die. Founders and those familiar with the startup environment understand these risks, but most people do not. So, before anything else, make sure that your potential investors understand the risk factor of investing in a startup.
In a text message he sent to prospective friends and family investors, Andrew Luong, a cofounder of Doorvest, spelled it out clearly: "Early stage investing is risky and often goes to zero."
Frame the pitch as an opportunity, not a request
If you are offering investors equity in exchange for cash, then you can frame their support as a form of seed investment, in which a small amount of money now can translate to a huge payday in a few years.
Very few people get an opportunity to invest in a startup on the ground level, a point Luong emphasized to his friends and family when pitching. Normally, only institutional investors have the resources to inject cash into a small company, because they have established the pipelines that enable them to seek out, research, filter, and then invest in promising startups.
For that reason, Luong and his cofounder Justin Kasad underscored the fact that they were offering their friends and family a rare opportunity.
"Yes, it was technically an investment into Doorvest, but the angle that we were pitching was more about giving them exposure to early-stage startups, or angel investing, which is something that we believe is an awesome class that most people don't have access to," said Luong.
Luong and Kasad were able to raise more than $100,000 in family and friends funding, before then approaching institutional investors, according to a spreadsheet viewed by Business Insider. The Doorvest founders were confident that they would receive venture capital funding, so their friends and family outreach served mainly to give their loved ones a valuable financial opportunity.
In this way, framing their outreach as an opportunity helped shift the psychology of the exchange, making it feel less like an obligation and more like a gift.
Be professional, it's time to practice your pitch
Treating your friends and family investors professionally accomplishes a number of things. First, it will increase the likelihood that they'll invest.
According to Matthew Dailly, the managing director at Tiger Financial, your preparedness indicates that you are serious about your work, and it shows family members that you have put a significant amount of thought into the project.
"If they see that you are passionate about this project and could make revenue from it, they will trust in it too and potentially share that passion," said Daily.
Dailly also says that your friends and family round is the perfect time to test out the pitch deck and presentation you plan on using with professional investors. This way, you go through the work of putting together all your resources, and you get a practice audience that will be much more forgiving.
In addition, treating the process as a professional opportunity helps keep it separate from your personal life. This is especially helpful when a family member declines to invest, because you understand that they are passing on a business opportunity, not on you.
Be specific about how much, how you'll use it, and how you'll pay it back
Laying out exactly how much money you want to raise, what you plan on doing with that money, and how you plan on paying back your investors all make your request feel more actionable.
Alex Tran and Kim Nguyen, cofounders of Seattle-based Rain City Cleaners, raised $32,000 from their friends and family. They also explained clearly how their investors' money would be recouped.
"We wrote a contract that stated we would return their money plus 1% interest," said Tran. "This was much better than us going to a bank and getting a business loan. There is no deadline for us to return the borrowed money."
Likewise George Pitchkhadze, the chief marketing officer of the vegan food service Thrive Cuisine, laid out the specific sum he was seeking for his business in the email he sent to family and friends.
"The sum I'm looking to raise is $18,000; no more, no less," wrote Pitchkhadze.
He received $18,330 in funding.
Friends and family investment script:
For the past (amount of time), I have been working on building (company name), a (sentence that succinctly and specifically describes what your product or company does).
In recent months, we have seen a number of encouraging signs of consumer interest. Our product has (insert applicable success metric, such as: been downloaded X number of times, accumulated X number of page views, generated X number of sales, increased revenue X%, driven X amount of engagement on social media, earned X amount of media coverage).
To capitalize on this growing momentum, our team has decided that it's time to take this project to the next level. In the next six months, I want to: (list of items you will use the investment money to accomplish, such as: launch an official website, hire a marketing agency, lease a storefront, buy raw material in greater volume, etc.).
By taking these steps, (company name) will be able to (insert quantifiable success metric, such as: "become the most popular dog-walking app in Portland," "generate $50,000 in sales by the end of the year," "capture 100% of the marijuana delivery market in the Lakeview neighborhood.")
To do that, I am inviting you to invest in (company name). I am looking to raise (amount of money) by (amount of time).
All investors will receive (a percentage of equity in the company; a promissory note pledging the full recoupment of your investment; a full return on their investment plus 2%; a percentage of net profit for the next 5 years; etc.).
Please note: As with all early-stage investment, there is a possibility that you will lose this money. Please consider this reality when determining what amount to invest.
Otherwise, if you're interested, please reach out over email so we can start working together.
I am also happy to send over my complete pitch deck, which includes a financial breakdown, competitive landscape analysis, list of my team members, and a roadmap for my product.
Thank you for your time, and I look forward to hearing from you.