If you’re like most people, you have a few regrets when it comes to money. 80% of Americans say they have financial regrets in some form or another, according to a survey conducted by Quicken. But when it comes to borrowing from or lending money to friends and family, the feeling of regret can take on a heavily personal angle.
In the best scenarios, investing with friends and family is more accessible and can lead to shared success. But there’s a reason why conventional wisdom says not to mix business with family and friends — you run the risk of losing money and relationships at the same time.
Whether you’re considering asking a family member to be the first investor in your startup or thinking about putting money into a friend’s new business venture, weigh the pros and cons carefully before making any decisions.
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What Are the Pros and Cons of Investing With Friends and Family?
Investing with people close to you has its advantages. It’s often quicker and more accessible than working through formal channels. Investment can arise from a single conversation rather than multiple introductions, meetings and pitches. In addition, friends and family will often invest for less equity than venture capital firms may require, leaving you more control over your business.
At the same time, there are numerous drawbacks. For instance, friends and family investment rounds are typically used to raise small amounts of capital, not huge sums of money. It can also put a strain on personal relationships if the business loses money. Furthermore, friends and family might not be able to provide the same level of mentorship and advice that professional investors can offer.
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4 Dos When Investing With Friends and Family
If you do decide to seek investment from friends and family or invest in one of their businesses, follow these guidelines to improve communication and reduce the chances that one of you will regret the decision.
Do Communicate Clearly About Risks
Transparency is the key when dealing with money contributed by people close to you. Ensure that everyone is fully aware of the risks involved. They should be willing to invest with the understanding that they could lose their entire investment.
Do Draft Formal Agreements
Put your conversation into writing by drafting a clear agreement that outlines the terms of the investment, including financial figures, equity stakes and repayment terms. Having a document you can reference for future conversations will protect both parties.
Do Choose Investors Wisely
Knowing whom to approach for funding is essential. Don’t borrow from or lend to friends or family who don’t have the required financial knowledge or resources to invest.
Do Treat Friends and Family Like Professional Investors
Stay professional and show your friends and family respect by treating them as you would any other investor. This means keeping them updated about the business’s progress and managing their expectations about milestones and financial returns. Establishing clear boundaries is key to separating your personal and professional relationships.
3 Don’ts When Investing With Friends and Family
Friends and family can be great resources when you’re starting a new business, but they shouldn’t be taken for granted. Avoid making common mistakes when investing with friends and family by following these tips.
Don’t Make Promises You Can’t Keep
Be realistic and don’t overpromise potential returns. Failing to meet these expectations can lead to bitterness and resentment down the line. On the other hand, exceeding your projected targets will only garner positive reactions.
Don’t Pressure Anyone Into Investing
Only seek investment from people genuinely interested in funding your venture from a professional standpoint and understand what they’re getting into. Keep your emotions out of the process and respect their decision either way.
Don’t Ignore Legal Considerations
Ensure that all investments you receive from family and friends comply with your local laws regarding fundraising. Involving loved ones in legal trouble is a sure way to damage your relationships.
Open, Transparent Communication Is Key
While there are definitely perks to investing with friends and family, the risks are significant enough to warrant serious consideration before proceeding. If you decide to mix business matters with your personal life, make a commitment to keeping communication open and honest at all times. Being proactive about having difficult conversations is essential for keeping your relationships intact, no matter what happens on the balance sheet.
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This article originally appeared on GOBankingRates.com: Investing With Friends and Family: 4 Dos and 3 Don’ts