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Using Friends and Family as Angel Investors

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Finding funding for your new business idea is not easy, and it is particularly hard to find an angel investor if you do not have contacts already in place in the industry. Many entrepreneurs turn to wealthy friends or family members to fund their businesses. This can lead to a successful business relationship, or a terrible failure.

The benefit of using capital invested by a friend or family member is that it is typically easier to obtain. Your loved ones care about you, and often believe in you, even more than you do. They have seen you grow up and know your drive and desire to succeed. They likely know that you are tenacious and believe that if you choose to start a business, it will succeed.

However, when you have those you care about invest in your business, it can lead to disaster, not just in your business, but also in your personal life. What happens if your business endeavor fails? How are you then going to repay the thousands that your favorite uncle lent to you? How are you going to feel if that money comes up as a subject at every holiday for the rest of your life?

Also, there are times that family members will say they are giving you a gift of the money. This is all well and good, except when your business starts to really succeed, they may want a piece of the pie. Since you likely did not go through the legal paperwork to make the investment official, what is expected at this point becomes cloudy. This can lead to damaged relationships.

That being said, using a loved one as your business angel is not always a bad idea. You just need to take some precautions to make sure that there are no miscommunications and failed expectations. With the right steps in place, you can have a successful business relationship with a loved one.

First, treat the money you are given as an investment from a stranger. Draw up all the documentation necessary to make it official. Involve your business’s lawyer to make sure everything is done legally.

One consideration you may want to make is whether you want to use the money as a loan or as an investment. If it is a loan, you pay the money back with interest. Investments, on the other hand, give the investor part ownership in the company. This may not be the route you want to take with a loved one.

Finally, try to avoid making your loved one someone who has a say in the business. This is not a good idea, because when you mix business with your personal and family life, feelings get hurt. Rather, if you do give them stock, make it what is called a non voting stock. This means that they cannot say anything about how you run your company. By doing this, you protect not only your business, but also your relationship with your loved one.

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