Quite a few start ups begin as bootstrapped companies, using their own out-of-pocket funds and being extremely frugal in their first years of business. Eventually most of these businesses find themselves in a spot where, in order to grow, they need outside funding. Many turn to family and friends for financial support. This can be a great way to help your friends turn a profit and a way for them to show you their support. However, borrowing money from friends and family can become quite a sticky situation.
If you are looking to go down this path, make sure you are prepared for he worst – before it happens. One of the best ways to safeguard a relationship from the possibility of your company’s unrealized financial goals is to tie financing to equity instead of a loan. It can be extremely difficult to dilute your ownership in your company in order to get the capital you need, but can ultimately protect your relationships with those close to you.
I’d love to hear from people who have borrowed from friends and family or are thinking about it and precautions that you took to make sure everything worked out. So, let me know. Have you had any experiences related to this topic?