Starting a business concern is a huge financial responsibleness. When you lot're just starting up, you'll need some cash in your pocket to get the brawl rolling. And the outset people you might plow to for back up are your friends and family. You lot might have heard of this as the "friends and family unit round".

Raising capital means getting funding from others that would help your business grow. You lot can raise capital from friends and family unit through 2 principal ways – debt or disinterestedness. Though it might seem simple, there is a right way to heighten capital from friends and family.

Too often many startups become this incorrect, equally they think friends and family are an easy kickoff opportunity for some extra $$. Just even when yous are doing business with friends and family, you lot need to treat them with the same level of professionalism as you would with any other investor.

In this article, we'll walk y'all through how to raise capital from friends and family the right way.

Debt Or Disinterestedness – Which One Is Right For Me?

Your first step is decidinghowyou desire to raise that capital.

There are many different ways yous can go some early cash to get your business running (for a broader agreement on financing your business organization, head over to our Finance Guide here). But when you attain out to friends or family, mostly your options are debt capital or equity upper-case letter.

Debt

When you plow to friends and family for debt capital, this usually means yous're getting aprivate loan.

There are two types of individual loans – secured and unsecured. Put simply, a secured loan is when you have personal or valuable avails (such as your business firm) that the lender takes as "security". An unsecured loan does not have this.

And while it might seem like your friend or relative is lending you money in good faith, they might all the same have lingering questions. How much is the loan exactly? What'south the interest charge per unit? When volition it exist repaid? What happens if the loan isn't repaid?

To brand certain you're doing information technology correct, and to avoid any awkward situations or relationships later, information technology'southward better to fix the footing rules and make certain your legals are straight.

The type of contract you volition need is called a Loan Agreement.

If it is a secured loan, yous might demand to register the 'security' on the Personal Belongings Securities Register (PPSR). You might also need a divideSecurity Agreement.

You can detect out more well-nigh loans hither.

A loan is a groovy choice if you can afford making repayments and have friends and family who'd exist happy to lend you money. It'south specially good if yous want don't want to give away besides much equity too soon.

But, for about startups and pocket-size businesses, this isn't the case. Many founders cannot afford making repayments, and many aren't willing to expose their personal assets as security.

This is when disinterestedness might be a more attractive option

Equity

Equity raising is when someone invests in your company in return for role ownership or "shares" (even if yous aren't actually making whatever coin even so!). There are also variations of equity, such as the "SAFE Annotation" introduced by Y Combinator in 2013, or the more traditional "convertible notes" which we wrote nigh here.

Equity might sound like a win for startup founders: getting cash in their pockets now without having to pay it back. But, it has its own risks. It means you are giving away function buying of your concern. While giving abroad 10% of your business might seem like nothing now, this 10% could be worth $1 million in a few years. And that's $1 million yous could have kept.

This is why equity raising is an attractive opportunity to investors: it might be loftier chance, but a potentially large win for them in the long run.

As you can come across, equity raising comes with its ain risks and benefits for both startup founders and investors. And so if you've decided to get ahead with raising disinterestedness capital letter from friends and family, it's important to do it right.

So what's involved in raising equity?

Step One: The Pitch

When you beginning approach friends and family for equity capital, you will demand to start as yous would with any other investor: with a "pitch".

In startup lingo, a "pitch" is when y'all lay out your business idea, what trouble it'southward solving and where you encounter it going in the future. This is how y'all convince them to put their coin in the growth of your startup.

So, before you practise your big pitch in front of friends and family, you'll need 3 things.

First, you'll need a "pitch deck" – a presentation of simple, captivating slides that would sum up your pitch and entreatment to your friends and family.

Second, it's always a practiced idea to prepare a pack of documents, which includes any financial or industry evidence that would back up the viability of your business organization idea. These documents give your pitch credibility and reassure your potential investors that you aren't over-valuing your startup.

Lastly, you'll need a Term Sheet. The Term Sail essentially sets out the key terms of the investment. When requesting investment from friends and family, they might be request questions like: how much ownership do I get in render? What human relationship will this mean in the long run? How do I know my coin is being well spent? A Term Canvass is your opportunity to respond these questions for them.

Having these three documents prepared for helps investors encounter that y'all've really thought about this and how it would work going frontwards, making them confident that they're putting their money into a existent business human relationship.

And, if y'all want to exist extra cautious, it might be a practiced thought to think most having a Non-Disclosure Agreement (NDA) in place earlier y'all showtime discussions with investors. This helps protect any confidential information that you disclose during your meetings (but be conscientious to only use an NDA in the correct situations!).

Stride 2: Getting It Down In Writing

So you've pitched your business organisation to your friends and family and they're nifty to become on lath as investors – cracking!

What's next?

Now, yous'll need to retrieve about your legals.

To make certain you're fulfilling all your legal obligations to your investors, you need iii types of legal documents:

  • A Shareholders Agreement
  • A Share Subscription Agreement
  • IP Assignment Deed

Sounds like a mouthful, but don't stress! We're here to unpack it for yous.

In one case your friend or relative has come on board with part ownership of your company, they are officially a "shareholder".

This is ever an exciting opportunity, but you desire to make sure you lot're both on the same page with how this new relationship will work:

  • How are decisions fabricated?
  • What happens when a shareholder wants to go out the company?
  • What happens if there is a dispute?

Even if you're in business with friends and family, having ground rules is always healthy for the relationship and business, particularly as your business organization grows and the stakes become college.

Which is why y'all demand a Shareholders Agreement.

A Shareholders Agreement is an important contract between business owners that covers matters from share ownership to the process for issuing new shares, the payment of dividends, and how to resolve disputes.

If at that place is already an existing Shareholders Agreement, information technology's a good thought to check whether the existing Agreement needs to be reworked to the needs of the new shareholders.

Next, you will besides demand a Share Subscription Agreement. This is a separate contract under which a new shareholder (or the "subscriber") is issued shares. A Share Subscription Agreement outlines the promise made past a potential shareholder to contribute funds in return for disinterestedness in your company. Specifically, it will set out the number of shares to exist issued, any vesting weather, the timing of the share issue and the price of the shares.

In nearly cases, it would be fine to provide a Share Subscription Letter (which is nonetheless legally bounden!). But for more sophisticated investors, they might be after a more comprehensive Share Subscription Agreement – a longer form contract with extra protections for both sides.

Finally, you'll demand an IP Assignment Deed. Ofttimes, this can be included in the Shareholders Understanding, but information technology works fine equally a separate certificate also. In whatsoever concern, it'southward important to protect your intellectual property (IP). This includes anything from branding to products and everyday know-hows of your business.

An IP Assignment Deed makes sure that any IP avails are owned by the company and you're making sure that value is created in the company. Y'all don't want to later notice out that some key IP is individually owned by a shareholder!

What To Take Away…

Then nosotros've given you a quick lesson on the two types of ways friends and family tin can help your business organisation get on its feet – debt and disinterestedness. But, it'due south important to make sure these arrangements are put down in the appropriate legal documents.

Why?

Even if they are your friends and family, it is ultimately a business organisation human relationship then it's always a good idea to make sure you're both on the same page. Having the right contracts in identify will help avoid whatsoever disputes nigh what terms y'all both agreed to, and tin help avoid many awkward situations in the future. This style, both you and your investors volition have clarity and confidence in your business relationship.

When your business somewhen grows, the last matter you want is a messy situation where you and your shareholders clash because you don't have any solid agreements in writing.

Raising capital from friends and family the right style ways you have a professional business human relationship, both sides are kept happy and you tin nourish those family barbeques without awkward questions.

Withal don't empathize what all the different legal documents mean? Or need help getting your capital investments downwards in writing?

We're hither to assistance! Our friendly squad tin can set you up with a consultation with one of our corporate lawyers to advise you on your side by side steps, or we can get started right away on your legal documents.

Yous tin can achieve our friendly team at 1800 730 617 or drop us a line at team@sprintlaw.com.au for a costless, no-obligations chat.

Regie Anne Gardoce

Regie is a lawyer at Sprintlaw, with a police force degree from UNSW. Regie has previous feel working across law firms and tech startups, and has brought these passions together in her work at Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal feel. Before starting Sprintlaw, he was an M&A lawyer at a top-tier police firm advising businesses of all sizes from large corporates to startups.

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