“To us, family means putting your arms around each other and being there.” – Barbara Bush
Your family members, especially your parents, are always there to put their arms around you when you need them. But what if you need more than just a hug?
Whether you are starting a business, plan to expand or need to recover from losses or mistakes from your existing one, you will need more than just hugs and moral support from the people around you. You will also need funds!
No matter how nerve-racking it is to ask for financial support from your parents, it is often the most practical thing to do. Rather than borrowing from a bank with high interest rates or asking an investor who requires too large a stake in your company, getting funding from your parents will lessen the burden of having to think of such additional costs so you can focus on your own business.
Your family will ideally also be more lenient regarding payment terms and interest rates. In fact, they might even allow you to pay them at a later stage without any interest.
So, here are some proven tips on how to convince your parents or family to invest in your business. (The advice is free; just thank us later.)
1. Clarify Your Intent and Purpose
For what will you use the money? Is it to rent out a space for your business or to develop a new product? Will you use the money for expansion to build more branches or to cover some losses? Do you need it to lower the equity to be given to other investors or do you just need it as show money for your bank loan?
Be clear about how exactly you intend to you use the money. Doing so will give your parents enough ground to decide if they could and should give you the money.
Also, be honest and do not just say what you think they want to hear and what they would most likely approve. This will be the start of your professional relationship with them and you would not want to start it off with lies which will only destroy both your professional and personal relationship with them.
2. Be Sure of the Amount
There is nothing worse than saying you only need $50,000 and having to ask for an additional $20,000 two months later. If you seem unsure of the exact amount, it will only suggest to your parents that you have not planned the business probably and are not good with finances: the very things that say a lot about what kind of entrepreneur you will become and what kind of business you will run.
So, analyze how much you really need and clarify this amount with your parents. Also, always add an extra cushion amount for when you encounter minor financial setbacks along the way. In addition, consider how much money you would need for living expenses, if you do not have a regular job while working on your startup? Add that cost as well to avoid spending all the funding on your living expenses instead of on your business.
3. Know What Type of Funding You Need
Carol Beesley, regular contributor at SBA.gov, emphasizes that you need to clarify what type of funding you are looking to get from your parents.
There are two common types of funding:
- A loan: You will need to repay the amount given to you over time (with or without interest).
- A direct investment: The amount invested will be in exchange for shares or equity in your business, plus, sometimes, an active role in how the business is run. There is more skin in the game and involvement with this type of funding compared to a loan.
She adds, “However, think hard about whether you want your family or a friend involved in your business operations on a day-to-day basis. Likewise, what are the emotional consequences if you are unable to repay the loan?”
Alternatively, if it is possible, would you want to get an early inheritance? Tom Deans, family business expert and author of the best-selling book Every Family’s Business, was quoted saying, “The money is forwarded to the kid while they (the parents) are still alive. There’s an element of reward for the parents to see their legacy put to good use while they’re alive.”
This option will allow you to focus on your business without the pressure of either having to pay back a debt or dealing with your parents as part-owners of your business.
4. Ask yourself, “How much Involvement in the Business Do I Want from Them?”
In addition to being honest with your family, be honest with yourself regarding how much involvement you are willing to let your investor or lender have in your business. Establish limits as you would with any other investor. Just because they are your family does not mean they will not do harm to your business, though it may just be unintentional.
Let them know their place before they assume otherwise and act as though they are co-founders or, worse, your bosses! It can be difficult to get rid of your parents’ view of your relationship as only parent-child or provider-receiver and not as investor-business owner. So, make sure to discuss their roles and involvement in your company thoroughly and put it in writing!
5. Provide Sufficient Proof
As discussed in our previous post, convincing your parents to support you and your startup requires you showing them that you have a solid business plan in place!
Parents often do not support startups because their children do not have a great action plan, a unique and doable business and marketing plan, a Plan B if all else fails, and a solid financial plan. Of course, when asking for funding, rather than just moral support, these plans should be even more thorough.
Aside from the plans mentioned above, also include a short business outline, your five- to 10-year projections, a list of the people with whom you will be working, especially the key executive positions, and your current financial situation.
6. Set Dates
This is not only the kind of date where you treat your parents to lunch or dinner, though that could help.
If you are asking for a loan, set exact dates for repayment as it is crucial for both the lender and borrower to know these beforehand for better financial planning. The lender needs to know when the borrower intends to pay and the borrower needs to be prepared when the lender expects to be paid.
If you are giving them equity, which you definitely must do if it is an investment, set quarterly or bi-annual meeting dates to discuss the company, its growth and possible ventures. Depending on the business model and the level of your parents’ involvement in their investment, agree beforehand how often both parties want and can make update meetings? Such meetings will let them know how the money they entrusted you with is doing and will show them that you are on top of your business’s finances.
Also, if you know your parents could be of help in your business, set regular meetings to consult them for advice about the business.
7. Establish the Equity Details
According to several industry experts on Quora, it is advisable to give equity to all your investors, even, and perhaps moreso, if they are your friends or family.
However, since your business is just starting up, you cannot give them a lot of equity in the first investment round since that will leave less equity to give to the second round of investors.
As the founder, you will start with owning 100% of your own company. But, you will undergo founder dilution when getting funding from angel investors or VCs or even when giving out equity to your employees.
Ideally, you should keep more equity with yourself in the first round of funding so you can dilute at a later stage when you need additional investments. An already diluted founder equity in the first round only spells disaster for your stake in the company.
Fred Wilson, an experienced Venture Capitalist for 30 years, says the following about how much equity is typical for entrepreneurs:
In my experience, it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it’s all said and done. The equity split at 20% for the founders will typically be 20-25% for the management team, 20% for the founders, and 55-60% for the investors (angel all the way to late stage VC).
Of course, you should not only base the amount of equity you give on the amount of money you have received from the investors versus the total money available to the business. For instance, if 50% of the funds come from your parents and you add the other 50% from your savings, it does not mean that you should give your parents 50% equity in your company. This is mostly because you are giving most of your time and talent to the business.
So, you should base the equity you give investors on the valuation of your startup. This valuation will depend on the growth potential of your business and not on its current monetary value. It will be thus be based on a variety of factors, including:
- Distribution channels
- Hotness of the industry
If you are getting your family’s support when you are just starting your business, it would be best to get a convertible note which could be transformed into equity once you have enough of these bases for a better valuation, as advised by industry experts on Quora.
[Image source : Boughtonlaw]
8. Keep it Legal and Professional
As much as you cannot take away the personal dimension of this transaction, try your best to keep it as legal and professional as possible. Treat the transaction as you would any other and treat your parents like the investors they are.
In this situation, a promise is not enough. Everything, from how much money you are getting to how often you will be required to update your family, should be put into writing and backed with legal documents.
So, this is not the time to scrimp on hiring an attorney and the loan contract between the lender and borrower should be drafted by the lawyer. Such a contract should also, at the very least, contain all these parts:
- Parties involved
- Principal loan amount
- Interest (if applicable)
- Date(s) of repayment plus the date of the final or complete repayment
- Penalty or course of action for the borrower if he or she does not pay on time (such as additional interest, collateral or equity)
- Amount of equity and control over the business
- Loan terms
9. Give It Your All
Jody Porowsk, founder of Avelist, sold her house to fund her company which showed her investor friends and family that she is giving this shot her all. This gave them an additional incentive to invest in her company as well, knowing that Jody would sacrifice a lot more than her house to make her business work.
She also says, “If you don’t have personal money to invest, consider the other ways you can ‘invest’ in your company and prove your dedication. You have time, talent, passion, and energy. How many hours a week are you working? How much of your social life have you given up? How much of your mental energy does your company consume? If you’re taking money from friends and family, you better be ready to give it your all!”
10. Accept No as an Answer
As with all requests, especially when it comes to finances, be prepared to get a no. Do not be a brat if your parents decide not to invest and fund your startup. Show them your maturity and ask them if this is a “definite no” or a “never” or if it is a “no for now”. If it is the latter, ask them professionally when the best date will be to come back to them and what other things they need from you to get their yes.
Doing so will clearly indicate to your parents how much you want to make the business successful and how much you would protect their investment. After all, you, as the founder, gave more in terms of money and dedication.
There you have it, ten tips that could help convince your parents or family to invest in your business.
Are you an entrepreneur who asked financial support from your parents when you were starting out? If yes, let us know how much easier or harder it was for your business with your parents as investors.
As always, we would love to hear if these tips work out for you too. Did your parents say yes to your proposal when you applied these tips?