When investment makes you more than friends
Q: I’m thinking of asking my friend to invest inmy business but I’m worried about mixing friendship with business. Is this a good idea? What are my options here?
A: Approaching friends for investment in a business is pretty common, particularly early in a start-up’s life before other investors will consider getting involved.
But it does come with its own unique set of concerns, along with all the usual considerations in raising external investment.
Typically, dealing with friends may be faster, easier and cheaper than approaching other investors at the outset. And although this can help in the short-term, investors, friends or otherwise, will have an immense impact on your business in the long-term.
Particularly when friends are involved, there is a tendency to cut corners.
In the worst case scenario, friendships can be lost completely and mishandled investments can present legal risks.
On the other hand, we’ve met successful entrepreneurs who have lost friendships for not approaching friends to invest in their business.
In the end, you’ll need to consider the impact on your friendship and make a call on whether to approach a friend or look elsewhere.
If you do go down the path of involving friends in your business, the best time to prevent and mitigate challenges is at the very beginning.
Before introducing any investor to the mix, look internally and build a clear picture of what you want to achieve and your own commitment to the business.
This will help give deeper insight into what you need to achieve your goal.
Often money isn’t the biggest influence on your business – people’s skills, personalities and connections can make a far bigger difference.
From there, thorough and transparent communication on both sides of the relationship is key to ensuring any investment outcome is a positive one.
It’s important to define expectations around the business, the risks, the investment terms and the relationship dynamics going forward.
It may be worthwhile to emphasise upfront that both sides can say ‘‘no’’, at any point, and walk away with the friendship intact.
Establishing mutual understanding of each other’s drivers ensures aligned goals and will factor into the details of the deal.
Between considerations of equity versus debt, amount of investment, how it is spent, responsibilities, roles, and much more, there are details to cover off that could fill an entire newspaper.
Put simply: do your homework, ask each other every question you can imagine and put as much detail into a written agreement as possible.
There are a number of free, plain-English templates you can find online to give you a starting point – we personally use those provided by the NZ Venture Investment Fund.