What To Do When a Buddy Asks for an Investment in Their Enterprise

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During my temporary tenure on the Nashville Entrepreneur Center, I started listening to a brand new query from family and friends:

Can I let you know about my enterprise concept?

To their credit score, typically these people had been additional alongside:

We’re bringing in early stage capital and I assumed you’d like to listen to about it.

I’ve come to study that this query is loaded like a Wendy’s baked potato — and equally dense with unseen risks.

If you’ve been requested this query, how do you are taking off the friendship-goggles and see the chance clearly? What sorts of questions must you ask earlier than saying “sure”? And how do you say “no” with out making issues awkward?

Let’s cowl what to say and do when a good friend asks for an funding of their enterprise, Choose Your Own Adventure-style!

The Short Version

  • When a good friend or beloved one pitches an funding alternative, it’s finest to right away set skilled boundaries and don’t be afraid to ask the robust questions.
  • Don’t neglect which you could at all times “make investments” time and expertise into their enterprise, supporting them whereas defending your personal portfolio from a non-compatible alternative.
  • Saying “no” to a beloved one will be exhausting, however within the startup world the “it’s not you, it’s me” strategy works surprisingly effectively.

1. Ask for the Elevator Pitch

If a good friend or member of the family has an thrilling new enterprise, they might act a bit overzealous of their preliminary strategy. They would possibly wish to let you know the entire story behind the concept, how the potential is sky excessive, and the way they’ve already begun talks with VCs.

This is your alternative to set your first boundary and hold issues skilled.


By merely saying “Hey, that sounds attention-grabbing, let’s hear the elevator pitch,” you’re subtly nudging them to deal with you want another skilled investor.

Choose Your Own Adventure:

  • You hear the elevator pitch and are genuinely desirous about studying extra in regards to the investing alternative. Keep studying.
  • You hear the pitch and assume “I wish to assist this particular person, however not with cash concerned”. Skip to Step 8.
  • You’ve heard sufficient and also you’re able to say no, Head straight to Step 9.
  • The pitch is worse than you thought it will be. Skip forward to the nuclear possibility.

2. Request All the Necessary Documents

If you hear the elevator pitch and assume “Gee, they might be onto one thing right here,” the next move is to ask for the paperwork so you possibly can conduct your personal due diligence on the enterprise.

This consists of:

  • Pitch paperwork
  • A marketing strategy
  • Proof of traction (e.g. letters of intent, gross sales references, and so forth.)
  • Investor proposal letter
  • Charter/articles of incorporation
  • Founder/shareholder settlement
  • IP agreements and NDAs
  • Financial statements

  • They’re Johnny on the spot with at the very least a marketing strategy and an funding proposal. Keep studying.
  • They’ve bought some lacking “geese” right here! Skip to Step 8.

3. Evaluate the Offer As Objectively as Possible

When it involves assessing a startup investing alternative, it should not matter if the founder is a complete stranger or your finest good friend for 20 years.

When you’ve been approached with an funding alternative, even from a very good good friend or perhaps a blood relative, it’s necessary to view the founder and enterprise fully objectively. After all, that’s how clients and different traders will see them, too.

Because in relation to enterprise, management is all the things.

“An incredible concept with dangerous management is doomed. A mediocre concept with good management has a good shot.” says Adam Kahn, Principal at Unorthodox Ventures.

With that in thoughts, hear them out and proceed with warning.

4. Consider Whether the Opportunity Is a Fit for Your Own Goals

A much less skilled investor would possibly ask:

“Is this a very good investing alternative?”

A extra skilled investor will ask:

“Is this a very good investing alternative for me and my targets?”

Maybe your buddy has a sincerely good investing alternative, however the liquidity lockup interval is simply too lengthy. You’d reasonably have that money free to purchase the bear market.

“Whatever the rationale, the probabilities that your good friend’s firm goes to be a very good match in your funding technique are slim to none,” says Kahn.

  • The stars have aligned and also you’re vibing with this concept! To proceed exploring this chance, transfer onto Step 5.
  • You’ve heard sufficient and it’s not a match proper now. To decline and hold your friendship intact, skip to Step 9.

5. Ask the Tough Questions

If you’ve made it this far, it’s time to play Shark Tank. 

This is your probability to begin grilling your good friend. This could trigger some brief time period pressure in the event that they select to interpret your interrogation as an absence of religion — however a real entrepreneur will see it as an indication of curiosity.

Take word of what they are saying and the way they are saying it. If it appears like they’ve answered these questions earlier than, that’s a very good signal.

  • How a lot of your personal cash have you ever invested?
  • How will you earn money in your traders?
  • What are the most important dangers concerned, and the way are you addressing each?
  • How are you defending your IP? Do you’ve a full patent? Or only a provisional?
  • Who are your rivals, and what’s your chief aggressive benefit?
  • What is your gross sales technique, and lifelong gross sales thus far?
  • Do you’ve letters of intent from any main shoppers?
  • What makes your crew certified to run a worthwhile enterprise?
  • Have you retained authorized counsel to look over key paperwork?
  • How do you intend on scaling?

I prefer to ask ‘how’ questions,” says Kahn. “Pick a essential piece of the enterprise technique and drill down as deep as attainable. You do that to see how a lot of their technique is only a fairly infographic on a well-tuned pitch deck.”

If your cousin can deal with all of those questions with poise and charm, you would possibly critically think about changing into extra concerned.

If you’re prepared to hitch the enterprise and even safe some fairness, it’s time to begin documenting all the things. Read on to learn the way.

6. Lock It All Down With Paper

In my expertise, there are two varieties of individuals within the skilled world:

  • People who doc all the things, and
  • People who’re about to study the exhausting manner

I bear in mind graduating from #2 to #1. Years in the past, a good friend requested me to talk at her enterprise convention in northern Sweden. Although she couldn’t cowl my standard charge, she’d cowl the flights, the lodge, and the Köttbullar.

In whole, I took eight planes — 4 there, 4 again — and checked my bag eight instances. This amounted to a bag charge totaling $400. She declined to cowl bag charges, since she solely had the finances for flights — not baggage.

I’m the dummy who didn’t get positive particulars in writing. I assumed we had an “unstated settlement” to cowl all journey, when no such settlement ever existed.

I’m fortunate that my failure to doc this alternate solely value $400. In the startup world, using on “unstated agreements” may simply value you $4 million.

Documenting all the things — with NDAs, governing paperwork, or shareholder agreements — protects all events concerned. And in the event you’re not sure what must be signed, by whom, and when – seek the advice of with a small enterprise legal professional.

  • You sense resistance to the concept of rigorous record-keeping. Make a beeline for step 9.
  • You understand that this isn’t the time to signal your cash away, however you continue to wish to help the enterprise. Go to step 8.
  • Your good friend whips out a prepped and loaded file folder with collated paperwork and sticky tabs for the signature strains. Keep studying.

7. Set Professional Boundaries

Once you’re truly concerned as an investor in a good friend’s startup, it may be exhausting to maintain them from texting you at 2:13 am. By nature, most profitable early stage startup founders work across the clock, and will poke and prod you throughout off hours considering it’s in your personal finest curiosity.

Therefore, it is perhaps on you to preemptively arrange weekly or biweekly 1:1s throughout which the founder can fireplace at will. When that textual content rolls in effectively after workplace hours, you merely “stay up for listening to extra throughout our 1:1.”

That manner, private time between you and the founder — whether or not it’s beers, birthday events, or your daughter’s bat mitzvah — stays sacred, defending the connection from the stresses of startup life.

It could appear trivial, however boundary-setting could do extra work than another step right here to attain the twin objective of investing in a good friend’s startup: Achieving success whereas remaining pals.

Congratulations!!!

You are actually in enterprise with a good friend. 

8. Consider Non-Monetary Methods of Support

Sometimes you hear your good friend or beloved one pitch to you and also you assume:

“I wish to assist this particular person, however I’m undoubtedly not giving them any cash.”

And that’s completely positive! Sometimes non-monetary help is strictly what early stage founders want.

That’s very true in case you have a distinct segment ability. Perhaps as an legal professional, you possibly can assist them with CYA measures. If you’re a author, you possibly can assist them craft a extra compelling “Why” story to different traders. Or perhaps you possibly can simply play the function of a possible buyer, poking holes of their advertising, or be their hype-person at a networking occasion.

And if there’s nothing actionable you are able to do for them instantly, slightly ethical help can go a good distance.

9. Just Say No (Gracefully)

The phrase “no” is sort of a piece of glass; it may be a factor of magnificence, however it must be dealt with rigorously so nobody will get reduce.

It will be exhausting for entrepreneurs to listen to “no,” particularly in the event that they really feel entitled to your help. I bear in mind being known as a “sellout” once I selected a gentle company paycheck over becoming a member of my buddy’s Spotify rival. And when one other good friend and I filed a provisional patent, he bought understandably upset once I wouldn’t pony up $21,000 for the total patent.

But there are methods to say “no” that don’t step on any toes.

“Soften the ‘no’ with constructive recommendation and a proposal to be a useful resource for them going ahead,” Kahn says. The previous George Costanza “It’s not you, it’s me” strategy works surprisingly effectively, too.

A Few Lines to Let ‘Em Down Easy

You can say:

“I’m not looking for new investments in the meanwhile, however I’d be pleased to offer suggestions in your pitch deck.”

Or, if it’s a pure “no,” Kahn recommends saying one thing to the tune of:

“I typically need to cross on good corporations as a result of they don’t match my focus.”

And if it isn’t the proper time for you, there’s nothing unsuitable with telling your good friend:

“Thanks for contemplating me, however it’s not a match for my funding targets proper now.”

10. What if Nobody Should Invest in Their Idea?

So you have heard the concept and — to your horror — it is an actual stinker. As in, no quantity of help goes to get this enterprise launched.

It’s tough to be pitched a nasty concept from a good friend. You don’t wish to harm their emotions, however you don’t wish to see them spin their wheels losing money and time, both.

”In my opinion, the worst factor you are able to do is be overly constructive and lengthen their inevitable failure,” says Kahn. “That’s not what pals do.”

Instead, assist them uncover the identical points you see by way of a line of essential questioning.

“Any founder price their salt will admire you declaring their flaws to allow them to deal with them… will probably be as much as you to find out in case your friendship is ready to survive sincere criticism,” says Kahn.

It is perhaps a tricky dialog, however they’re higher off getting the sincere reality from you early than too late.

The Bottom Line

A good friend or member of the family asking you to spend money on their enterprise could be a difficult state of affairs. Whether you do or don’t, there are extra dangers concerned than meet the attention.

Thankfully, some cautious wording may also help you exchange their pitch right into a invaluable studying alternative. And saying “no” with grace is at all times an possibility.

And in the event you truly like listening to pitches, try our StartEngine Review 2022: Invest Like You’re On Shark Tank.

If you are searching for a safer funding, we have these too >>>

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