How to Ask Friends to Invest in Your Business

I have always believed that the best way to finance a business is through self-financing. It has a number of advantages, if you can afford it. The most important one is that you have complete freedom to run your business as you see fit. You don’t owe anything to anyone.

As a matter of that, that is how I financed my startup a decade ago.

Unfortunately, this doesn’t always work for everyone. Sometimes, your business needs more money than you can afford to invest. Or, you simply have no money to invest whatsoever. Your only alternative is to look for outside financing.

Personally, I am not a big fan of asking friends and family to invest in your startup. It puts your relationships at risk – and that is too high a cost for me. However, if you are going to do as friends for money, might as well do it the right way. I am going to give you some tips on how do this effectively and in a way that tries to preserve the friendship.

The big question: Debt vs. Equity

This first question you want to ask yourself is whether you want to raise money by getting a loan or by selling equity. This is not an easy choice. Both have their pros and cons.

Getting a loan gives you money without having to give up any ownership in the business. Your friend lends you money, which you pay back according to a prearranged schedule. Since your friend doesn’t have an ownership stake in the business, they have no say on how it’s run – at least in theory. And, they have no right to future profits.

Loans can affect your cash flow due to the repayment schedule so consider them carefully. Also, they can encumber your personal assets. I like to think of a loan as being expensive upfront but cheap in the long run if your company succeeds.

Selling equity allows you to trade an ownership stake in your company for money that you don’t have to pay back. In exchange for their money, the investor now gets a share of the future profits and (usually) a say in the company. I view equity injections as cheap upfront and that is expensive in the long run if you succeed.

Assuming the business allows it, my preference is to use a loan rather than selling equity. Loans have a specific end date which gives you and your investors a clean exit.

Get advice beforehand

Before proceeding, consider getting advice from a CPA or an attorney – preferably both. This will be money well spent. They will give you specific advice on how to set up the loan or equity transaction in an effective way. Don’t avoid this step. Yes, it’s expensive but necessary.

Ask your colleagues or friends to refer you to a CPA / attorney that understands entrepreneurship. They all claim they do, but that is not always true.

How to ask friends to invest in your business

Raising money from friends should be no different than trying to get a stranger to invest in your company. Actually, you will have a better chance of succeeding if you treat your friends as you would treat a potential investor you have never met before.

1. Be professional

Above all, treat your friends the same way you would treat a professional or angel investor. It doesn’t matter if they are your drinking buddies or if you have known them since grade school. Separate your personal life from your business life.  And when it comes to business, treat them professionally without exception. This should set the tone for the rest of the professional relationship.

2. Be honest

Create an investors presentation and give them an honest appraisal of the business. Make sure they understand the benefits and the risks of investing in your business. This includes the risk that the business could fail and they could lose all their money. This last point is key. However, many entrepreneurs avoid saying it because it’s uncomfortable.

Take the time to develop an accurate business plan and show them realistic sales forecasts. Never lie to them. Lying will get you in trouble and will jeopardize your friendship for ever.

3. Choose investors wisely

Never ask for money from friends that cannot afford to invest in your business. If you don’t think they can afford it, don’t ask them. Period.

If you are selling equity, consider asking only friends that can bring something extra to the company. This could be management experience, industry contacts, ideas, or just plain work. The last thing you need is a co-owner who has no idea on how to operate a business and brings nothing else than money.

4. Create a compelling presentation

Just like regular investors, your friends don’t have the time or inclination to read a 50-page business plan. At least, not initially. Instead, create a compelling investors pitch that outlines all the important details of your business. Spend some time doing this and practice your presentation before showing it to your investors.

By the way, having a business plan may come in handy later on. Savvy investors will want to read it before investing.

5. Have a lawyer create documents

Hire a lawyer to help you draw up professional loan or equity sale documents. You may be able to save some money by downloading a template from the internet and having the attorney modify it to fit your needs. This may be expensive but will protect you and your friends. Do not skip this step.

6. Honor your commitments

Once you have an executed financing agreement, follow it to the dot without exception. Meet all contractual expectations and make all loan payments on time.

7. Provide regular updates

Consider providing your investors with a regular update on your business. You will have to keep them up to date anyways, so it’s best if you formalize this process.

Use a prearranged schedule, such as every quarter or twice a year. Formalizing this step will also help ensure that you give each and every investor the same information.

8. Give them a chance to say NO

Don’t pressure or guilt your friends into investing in your business. Give them the option to say no and exit gracefully. Don’t hold any grudges if they decline to invest.

How to take no for an answer gracefully

You can expect that some – or even all – of your friends will decline your investment offer. This can be a painful experience for many entrepreneurs.  You feel they are rejecting your dream, and therefore, you. Don’t take it personally. Your friends have their own reasons for not investing and you have to respect them. For example:

1. They may not be able to afford the investment
2. They may be saving money for something else
3. They may not be comfortable investing in startups
4. They may not be comfortable investing in your business
5. Their adviser may have told them not to invest

Respect your friends right to say no. If they decline the opportunity to invest, thank them for the chance to present the business to them and move on.

Are there better options?

Before asking your friends for an investment, consider other options that don’t have the risk of jeopardizing friendships. There are a number of alternatives that don’t require involving your friend in your business. Good luck!

Source: http://factor-this.com/financing/how-to-ask-friends-to-invest-in-your-startup

What I Learned Raising Over $30 Million in Private Capital: Types of Money

A week ago, I had the opportunity to present about Raising Capital at the AAPL – American Association of Private Lenders event in Philadelphia, and although some of you missed it, why not cover some of the highlights?

Sure, it’s not the same as being there, especially since I had my securities attorney and another large private capital fundraiser answer questions on a panel at the end.

But, we covered some key components, such as: Types of Money, Money Myths, Mistakes Raising Capital, Tips on the Best Ways to Raise Money, Investor Relations, and the new Jobs Act, especially 506(c) and its implications.

Today, I’m going to cover Types of Money and why they’re so important.

If you can demonstrate to people where they can free up money or save money on this like taxes, it could be a huge help to them. Also, if you have an investment vehicle to put capital in, then you’ll probably raise more money too.

The reason that this is so important is that if you can demonstrate to people where they can free up money, or save money on things like taxes, and if you have a vehicle to put it in, then you’ll probably raise more money.

The concept of the four types of money really comes from Robert Kiyosaki: There’s Your Money, the Banks Money (OPM or Private Money), there’s the Tax Man’s Money, and there’s the House’s Money.

He also goes on to teach that there are three different asset classes that one can invest in: Businesses, Real Estate, and Paper Assets, with pros and cons to each class.

Businesses

Pro: This is the asset class that offers the highest of all returns on investments.

We once had a guy, who wanted to buy PPR, and his whole model was to purchase start-ups, add value, and in 3 years flip the business for a profit. We only have to look at Instagram or Microsoft to see how profitable investing in a business can be. If you really think about it, many tax laws were written to favor business owners.

Con: Businesses are the toughest asset class to own, develop, and maintain.

Real Estate

Pro: Real estate is the easiest of asset classes to leverage. It’s easier to borrow money for real estate than it is for a business or paper assets.

Con: For the smaller investor, real estate can be far more capital intensive than investing in paper assets. For example, I can invest $25 in Lending Club, a paper asset in the form of an unsecured note, but it’s hard to invest $25 dollars in a piece of real estate.

Paper Assets

Pro: Paper assets are the easiest of all asset classes to get in and out of. An example for me is that I can sell a note in less than 30 minutes. I’m not so sure that I could sell a piece of real estate that quickly. I could also trade a stock option in seconds or minutes.

Con: You probably have the least financial control. There are definitely fewer tax advantages, and they can also be highly volatile.

As Doug Andrew, author of “Missed fortune 101,” says, “These markets are like a person with a yo-yo going up stairs. Over the long term they go up (stairs), but there are ups and downs along the way (yo-yo).” And, Andrews advises his readers to protect themselves from the ups and downs of the markets.

Many people say that they’re diversified in one mutual fund or maybe in several mutual funds, but to me, if you’re only investing in one asset class, then you really aren’t diversifying.

I find to be truly diversified; you need to be investing in more than one asset class. An example of this would be Donald Trump, who invests in Real Estate and Business, or Warren Buffet, who diversifies between Paper Assets and his Business.

I like to think that I’ve been able to create synergy by investing in a business like PPR with OPM (Other People’s Money) from a Private Offering, while also using the Bank’s Money or Private Lenders to do my Real Estate deals.

I also like to think that I’m using as many Tax Strategies as possible to free up more of my money, by maintaining my RE license to take advantage of more passive losses through depreciation (not capped at $25K), and by setting up an ESOT (Employee Stock Ownership Trust) at PPR to save tax on our business revenue.

I do this, while also using my own money to personally invest in re-performing notes, which actually create synergy amongst all three asset classes.

It’s really hard to beat buying a note at a discount, with a high yield, that’s backed by real estate, with a homeowner occupant, who has a vested interest in paying their loan because they need a place to live.

And last, I like to think I’m able to take some of the House’s Money off the table by putting some money in a more protected, tax sheltered vehicles like IRA accounts and Insurance Contracts.

Many people tend to put all their money back into their business or their real estate investments, etc. But, I’m a firm believer that houses were meant to store people and not cash.

There are always market downturns, lawsuits, and bankruptcies out there, but there are also safer buckets that can be utilized to take some of the House’s Money off the table.

Source: http://www.biggerpockets.com/renewsblog/2014/08/14/learned-raising-30-million-private-capital-part-types-money