Forums: Discussions for entrepreneurs and small business.

I`m looking to start my business but need financing, but who doesn’t? I was thinking I could solicit family members and friends to help me, but I wanted to establish some investment criteria for them so they know what’s going on. The investment criteria would include things such as:

Investment amount
Rate of return promised by CEO
estimated length of Investment before return
Quarterly updates on company status
etc....

This is something I though about when talking to a family member and they were asking these types of questions. Would it make people more comfortable to invest? Is this a good idea and should I proceed. Thanks

The first question - will this be a loan or are they buying equity in your business?

Well that would be one of the criteria. if the business were to go belly up then I would try my best to recoup their money, but it is a risk. I would like to say it isnt but thats not realistic. And it could either be a loan with a rate of return or they could be purchasing equity.

When you say 25% return - I assume you mean per year - which translates into a 3 X multiple at the 5 year point. That would be on the low side of the return most VC firms look for.

When you "do the math" on a VC fund you`ll see why they need to look for the "grand slam" projects that offer the potential for a double digit multiple return.

Whether one is dealing with a venture fund (a firm that invests other peoples money), a professional angel or private investors - each is looking for a return commensurate with the risk as they perceive it.

mscott2097

If you do a loan with family or friends try using Circlelending.com. They help administer loans between family and friends.

This may alleviate some of their worries if a third party writes up a formal promissary note manages the loan payments.

I have not used them yet but I plan on using them with a loan I am working on getting from an uncle.

To add on to your thought - VC firms:

1. Invest other "peoples" money - their limited partners.
2. Each fund has a specific life - so they must have a exit point within that time frame.
3. Since about 50% of their investments go sour and their partners have high expectations - they need opportunites which can result in high returns - typically double digit multiples.

All of the above (plus more) make the VC firm quite a bit different from you family/friends. However, not all the differences are bad.

Also, these are not the only options for capital.