Not everybody has what must be done to grow a successful company from nothing or while operating on a shoestring. Or, maybe your business concept takes a significant injection of capital right from the start. If so, you've other options to bootstrapping. The most popular approach is to find an investor.
Investors, either individuals or perhaps a group of individuals, subscribe to your idea and provide the money you need in exchange for stock (or a percentage of ownership) in your business. You can choose from several types of investors; each type comes with its benefits and drawbacks, of course. The trick is to find the best type of investor for your needs.
You're probably acquainted with the thought of turning to friends and family, or the F&F network, for start-up funds. A major advantage of this strategy is that you have a lot of flexibility in how you structure the terms of the agreement.
The simplest method is to merely ask for a loan. You need a certain amount of cash, and your mom or best friend is happy to oblige. As a bonus, the interest amount on the loan is usually minimal or non-existent, and also the time for repaying the cash is open ended - not necessarily a bad deal.
An alternative is to undertake your friends and family as investors. In short, you give up a percentage of shares or stock in the business for that amount of money they agree to provide. On the upside, you don't repay that money. However, if you no longer want those individuals to possess a bit of your business, you have to buy back their stock to get eliminate them. Here are a few benefits of acquiring investors from your F&F network:
You can easily obtain the money. You possess an established circle of friends and family members who know and trust you. Sometimes, you do not even need to sell them on your business idea - let alone show them your business plan. They just want to help you.
You can get cash quickly. Unlike going to a bank or venture capitalist, it's not necessary to jump through any "lending" hoops or participate in a series of drawn-out meetings. Friends and family might be able to get their hands on cash quickly and hand it over to you sooner.
You've got a potentially large pool of investors. You can easily find small quantities of money from lots of different sources. If you need $50,000, you can get 10 friends to contribute $10,000 each rather than try to look for one individual who can contribute the entire amount. This process has a few disadvantages too, of course:
You can experience unstructured terms: Since you know each other, you often keep things informal. That paves the way to uncertainty and inconsistency and big misunderstandings. Be wary of dealing with friends and family members as investors without structured, written agreements that clearly define the terms of their investments in your company or the payback terms of your loan.
You may give up too much stock: You need to gratefully reward those who take a chance you, especially when you're near to them. For that same reason, however, you can end up offering too much interest in your company. Or, if you turn to a sizable group of friends to invest, you may have to fork out a large block of stock for a small amount of cash. This uneven exchange can put you in a precarious position because the company grows.
The business can interfere with relationships: Taking on your most trusted circle of friends or family as investors can lead to heated disagreements, hurt feelings, and your great amount of misunderstandings. Damage to these friendships or relationships with family members is hard to correct.
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