In the last post, we covered raising cash by selling common stock to friends and family (F&F). This week, we’ll cover raising early-stage capital by taking a loan from this group and what that means for your business.
As previously discussed, most investors in follow-on rounds expect that you used your own money plus sweat equity to fund your business. If you’re savvy, you’ll already know from your detailed financial plan what your cash needs will be going forward. You’ll also understand that you’ll reach a point where your cash needs exceed the cash flow available from the business, requiring you to obtain outside funding.
Many founders consider taking a loan from F&F to raise capital. Money can be loaned to the founder personally or to the corporation, and is usually accompanied by a promissory note or a loan contract, both of which are legal lending documents if properly written and signed. Just like a loan from a bank, both require repayment of the loan and contain terms regarding interest rate, repayment timeline, and consequences if you fail to repay the loan.
F&F Raise Options: Why Not to Raise Debt
If you’re going to need additional money for your start-up in the future, we don’t usually recommend taking a loan from F&F at this early stage. There are a few reasons that this isn’t a good idea, namely:
Raising capital using debt from F&F at an early stage may be a good option if you won’t need additional funding in the future. However, since most startups will need additional funding, we don’t usually recommend conventional debt financing to early-stage companies.
So what do you do if you’re an early stage company, have run out of personal resources, and need to raise your first round of fund? Over the coming weeks, we’ll cover three other capital raise options for the early stage that are much better choices.
Are you considering how to raise your first round of money from F&F? Have you explored all of your options and are confident that you’re making the best choice for long-term growth and value? To learn more and how we may be able to help, schedule a one-hour call with us here.
Until next week!
All the best,
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