Monthly Archives: November 2013

San Diego Founders’ Fight Club Pitch-Off

San Diego Founders’ Fight Club Pitch-Off

The San Diego startup ecosystem is growing, along with the resources available to entrepreneurs. Mentor programs, co-working spaces and meetup events over the past few years have increased at an exciting rate. Along with our Entrepreneur Spotlight video series, The Startup Garage is going to cover monthly startup events to showcase the exceptional talent in our local area. Unless expressed, the startups and entrepreneurs in these series are not clients of The Startup Garage.

Wednesday November 7th, 2013

Ding, Ding, Ding! There was no Brad Pitt, broken ribs or bars of soap but The Founder’s Fight Club was just as entertaining as the Hollywood film.
 

Pitch-Off Details

Winner: Receives $2,000 in legal services from Cooley

Round 1: From a total pool of around twenty, two Founders square off against each other in a 30 second battle round.  A panel of three judges picks the winner.

Round 2: The judges then ask a series of questions to the winners of Round 1.

Round 3: The winners of Round 2  undergo another rapid fire quiz from which the ultimate winner is picked.

SDTechScene_Founders-Fight-Club

MC – Brant Cooper, Market By Numbers

Panelists

David Turner, CEO Parallel6
John Girard, Advisor, Founder, Mentor
Rodney Rumford, Co-Founder RapidEngage
Navid Alipour, Investor

Startups Highlighted in Video
 

House Call

HouseCall is a mobile app that connects you to a marketplace of the best home services professionals that live and work in your neighborhood.

HouseCall consists of one mobile app for homeowners and one for service professionals. We give homeowners a seamless way to order and pay for home services from pros that are nearby. We provide tools for service providers to manage their mobile workflow, while also connecting them to the HouseCall marketplace. [via website]

HouseCall was recently accepted to the latest cohort of startups at EvoNexus, the business incubator of CommNexus.
 

AryaBall

AryaBall allows children and adults a like to play football, soccer, baseball and golf with a single ball and bat.

Our passion is to also help parents turn their kids on to as many sports as possible, as early as possible, in hopes of promoting good health, team work, and tenacity so they can lead full and meaningful lives. That is why 5% of all net proceeds will be donated to sports programs of local schools. [via website]
 

Zlata Life

ZlataLife is a transformation coaching practice which combines nutrition, fitness and accountability coaching. It educates people on basic principals of healthy and active lifestyle. Zlata Sushchik creates’ customized plans for her clients needs, goals and habits to help them achieve their optimal lifestyle. It is designed to provide virtual coaching utilizing the internet based communication services. [via website]
 

StockJoust

Stockjoust is a virtual stock trading platform. At the core of our platform is head to head stock market games for real money rewards. Join Stockjoust and hone your stock portfolio strategies against other competitors. As iron sharpens iron, a stockjouster sharpens another stockjouster [via Facebook]

 

The Industry Rag

San Diego tech startup. We’re aggregating commercial content on tablets and phones. [via Facebook]

 

AttackIQ

After spending millions on security solutions, how are you currently measuring your security posture? [via website]
 
And The Winner of San Diego Founders’ Fight Club Is…
 

QuickSolar

QuickSolar allows professionals to quickly and easily design a solar energy system on their customers’ or clients’ rooftops.

With minimal user input, you can drag and drop solar panels directly onto almost any roof using Google Maps imagery.

As you add and remove panels from your design, QuickSolar performs all the necessary calculations to show you how much solar energy you will produce, how much you will save, the amount you can expect to invest, as well as the amount you can save through tax credits, rebates, and other local incentives. In short, Quicksolar provides fast accurate answers to your customers’ most common questions about solar energy! [via website]

 

Rodney Rumford of RapidEngage leans forward from his panel chair, while Brant Cooper announces the round's champion startup fighter.

Rodney Rumford of RapidEngage leans forward from his panel chair, while Brant Cooper announces the round’s champion startup fighter.

 

 

 

 

 

 

 

 

 

Photo Credits:

Live Event Photos Courtesy of SD TechScene

How to Allocate Friends and Family Capital

Allocate Friends and Family Funding with The Startup Garage

How to Allocate Friends and Family Capital

The most important principle of startup fundraising that every entrepreneur needs to know is: raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment. The use of your initial friends, family, and founders (FFF) capital should be directed towards achieving the milestones that will attract seed investors (likewise, the use of your seed funding should be directed towards achieving the milestones that will attract Series A investors). Below are the milestones that you will need to achieve in order to attract seed investors and therefore the milestones that you should invest your FFF capital.
 

Business Plan

You may have gotten through your FFF round without a business plan, but in order to attract seed investors you will need a comprehensive plan complete with extensive market research and a detailed financial model. A major piece of the business plan will be your capitalization strategy demonstrating the milestone timeline discussed above as well as the effects of accomplished milestones on the company’s future valuation.
 

Product

A fair amount of your FFF funding will likely go towards product development. Depending on the complexity of your product you may or may not be able to complete a working prototype or beta version with your FFF capital. If not, at the bare minimum you will need an interactable wireframe mockup that demonstrates the product. You will also need proposals for the cost to develop the minimum viable product (the features that allow the product to be deployed).
 

Founding Team, Key Hires, Advisory Board

Seed investors heavily weigh the importance of the startup team when evaluating an investment opportunity. The reason is simple, the company will face adversity, things will go wrong, and the plan will change. But, if the right team is in place the company can overcome the adversity, fix the issues, and adapt the plan. If you cannot afford to hire the individuals with key expertise you may need to bring them on as co-founders with an equity stake or hire a part-time, interim individual or company. You can also bring these skillsets to the organization via advisors. In any case, you should plan on having a team member, service provider, or advisor for every part of the business other than your area of expertise. For example, if you are a tech expert launching a mobile app, you will want a team member, service provider, or advisor fulfilling the following roles CEO, CFO, sales, and marketing. At this stage, it is fine for one person to fill several roles so long as they have the expertise to fill these gaps.
 

Legal

Be sure to budget a small amount ($2,500 – $5,000) of your FFF capital to ensure that you legally setup your firm. Work with a lawyer to ensure that you are setting up the business according to what’s best given your goals and capitalization strategy. It’s better to pay a little now and get it right rather than have to go through the costly transition down the road.
 

Intellectual property

If your business can secure any intellectual property rights now would be the time to do it. Common types of IP rights include copyright, trademarks, patents, design rights, and trade secrets.
 

Market Validation

While all of these milestones are vital to the success of raising seed capital, market validation is towards the top of the list. In your pitch to FFF investors you told them that there was a need for your product in the market. In your pitch to seed investors, you will need to show investors this need. If you were able to build your product or a working prototype / beta version of your product it’s time to either get either paying customers or free users. Obtain customer feedback and demonstrate that your product is fulfilling a real market need.

Raising Capital from Friends and Family: Gifts, Loans, Equity

Gifts Loans and Equity with Friends and Family from The Startup Garage

Raising Capital from Friends and Family: Gifts, Loans, Equity

Raising Capital from Friends and Family: Gifts, Loans, Equity

Most entrepreneurs who are starting a new business venture need capital to fund their business plans. Typical sources of capital include personal saving, home equity loans and loans or investments from “Friends and Family.” Friends and Family capital typically is provided as: 1) a “gift” 2) a “loan”, or 3) an “equity investment.”

Gifts

Gifts from Friends and Family are great but the person making the gift may have gift tax implications, for example an individual can currently make a an annual gift of $14,000 tax free but anything above that amount requires a tax to be paid by the donor (note: a husband and wife can each make a $14,000 gift tax free, see: Frequently Asked Questions on Gift Taxes).

Loans

Loans can be provided with simple Promissory Notes that set forth a Principal Amount, an annual Interest Rate, a Payment Schedule and a Maturity Date. Sometimes entrepreneurs will use what are called “Convertible” promissory notes with Friends and Family and other early stage investors. Convertible notes allow the lender/investor to convert their loans into equity when the Company makes its first equity offering after operations begin. This equity is typically in the form of preferred equity (i.e. preferred corporate stock or LLC units) and the lender is able to convert his/her or its loan and interest into equity at a discount. The Promissory Note will be reported as a debt on the Company’s financial statement and the interest when paid will be income, taxable to the lender and a deductible business expense to the Company on its income statement.

Equity

Equity can be sold to a Friends or Family members, the challenge in this case is that the initial value of the equity is extremely difficult to price since the Company has not started operations. Selling equity to Friends and Family is tricky because once someone is an owner there is a new level of responsibility that entrepreneur takes on. Additionally, selling equity requires compliance with federal and state securities law even though the entrepreneur is dealing with Friends and Family members. If equity is sold to secure capital, then the Company and the equity owners will need to make some tax decisions to maximize tax savings both when Company is making or losing money (see: Should My Company Be LLC or S Corp?).

Seek Advice

Common sense suggests that regardless what type of investment or loan an entrepreneur secures from Friends of Family, that some professional advice and recurring communications are critically important.

Professional advice is recommended for a number of reasons, first, there are civil and criminal laws that govern the sale of securities (e.g. equity and convertible notes), there are also tax consequences for both the lender/investor and the Company which need to be understood by both parties.

Communication with Friends and Family who trust the entrepreneur enough to offer financial support is no different than dealing with a commercial bank. In fact, having clear, honest and on-going communications is critical not only for maintaining the business relationship, but even more so to preserve the trust of the personal relationships when dealing with people who offer help from a sense of love and respect.

 

About The Author

Mark Meyerdirk Mark Meyerdirk has been practicing law and operating business consulting business for over 35 years. Mark works with The Startup Garage to provide Capital Formation Packages.

Raising Funding From Family and Friends: Division of Equity

Division of Equity from Seed Investors with The Startup Garage

Raising Funding From Family and Friends: Division of Equity

When it comes to the division of equity in startup, there is a similar process every entrepreneur must follow beginning with raising the first round of startup funding and, if you’re lucky, finishing at the point of IPO. Today we are going to describe and analyze the stages up through friends and family funding. At this point, you should have a good idea of how you want to divide up your company and will be prepared for more sophisticated, future investors.

Stage 1: Idea

It’s just you and your idea. You created value in your company the moment you started working on your idea. This value will later turn into equity, but since you are the sole person and 100% owner in your company, you are more focused on the success of your idea and equity is simply not on your mind.

Stage 2: Co-Founder

As you continue to work on your idea, you realize you could use another body and brain to help with converting this idea into a physical prototype. You bring someone in and quickly see the added value of this person. You do not have the funds to pay this person, so you decided to add them on as a co-founder. In exchange for their work, you offer equity in your company.
How much equity do you offer? It can be difficult to give away a piece of your “baby”, and this early in the startup stage it is almost impossible to determine the valuation to your company. In reality, your company is probably worth close to nothing and your new co-founder is taking a huge risk. Each case is significantly different and there is no right answer. To ensure that the co-founder works out and sticks around for the 3-5 years that it takes consider vesting there shares over 3-5 years.

Stage 3: Friends and Family Funding

You need funding. The thought alone of another Ramen noodle meal makes you sick to your stomach, but you know you do not have enough of a working product, or time, to go to a VC or get a loan from the bank. You decide the next best thing is going to your family and friends for funding. You have looked at the advantages and disadvantages, and have decided it is the best option for your startup.

What is next?

Often, your friends and family are not going to willingly throw money your way. They want to know how much value you can give them in exchange for their investment. You need to come prepared with a kitchen table pitch and prove that your idea is the next best thing.
Your rich relative is on board and has agreed to give $10,000 in exchange for equity in the company. How much equity do you give her? It depends. Before you can give any amount of equity out, you must register your company. You then need to figure out what your long term financial goals are in regards to the amount of investors you need, want, or plan on having. You also need to think about how much equity you want to have set aside and available for your future employees in your option pool. Future investors will want and option pool, and more importantly it is ways of attracting talented employees to your startup. Employees will know the earlier they join your startup, the greater percentage of the option pool they will receive and will want to work hard to help your company on its possible journey to go public. Another thing you must keep in mind how these shares are going to diminish over time. The more investors you bring on and the more funding you receive, the more your company will grow; however, this also means less equity for you, your co-founder, and your future employees will receive. One way to do this is to agree on a value and give them the percentage based on what they invest. Another way to do this is set it up as a loan or a convertible note which avoids the need to agree on valuation until the next round of funding.

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

Asking Startup Founders For Human and Financial Capital

Seed Capital and Sweat Equity from The Startup Garage

Asking Startup Founders For Human and Financial Capital

Another group to consider asking for funding from is other startup founders and entrepreneurs. I know what you must be thinking, “I’m a startup founder and don’t have any money. I thought we were all in the same situation. How is another founder going to be able to afford and give me the funding I need to turn my idea into something tangible?” The key is to approach serial entrepreneurs.

Why serial entrepreneurs?

For one, they have been in your shoes. They have a good sense of what you are going through and know the amount of hard work and dedication it takes to make a business successful. These are people who have seen both success and, more importantly, failure. They know how likely it is your startup will fail, but are driven by the ambiguous path and are always itching to do something innovative and learn something new. For these reasons, serial entrepreneurs can give you some of the best startup business advice. If they do decide to invest in your company, they could become a strategic advisor.

Mentor vs. Advisor

What is the difference between a mentor and an advisor, and why does it matter?
Leveraging the help of those who have been there and done that is one of the simplest ways to give your company a competitive advantage. This role can be filled easily by a mentor or an advisor, but which do you do you choose? In order to get the full advantage for your company, it is important to understand the difference and figure out which is best for you.

Mentor

A mentor is focused on you. They concentrate on your personal growth and development as a business leader. Your mentor should be someone who has worked in similar companies and roles as you and can offer advice that is both professional and personal. You want them to offer advice that will help lead you in the right direction. Mentors should be there for you to give constructive feedback. They will best serve you with their entrepreneurial insight by providing the support and validation you need to gain confidence and learn to work through your issues. The keys an effective mentorship include listening, sharing mistakes, being supportive, asking questions, being credible within your area of expertise, offering objectivity, and modeling good entrepreneurial behavior.

Advisor

An advisor is focused on the business. They care more about the business ends of things than your personal growth. You want someone who knows the industry and can open doors that can help the business. You want an advisor who will add value to your company through their experience and knowledge. An advisor is there to offer you direct, proactive advice and is typically paid for their services through equity. Many companies will employ high-profile advisors believing that it will bring their business more credibility to future investors and strategic partners.
One of the greatest tools that come from having a mentor or advisor is the network of business people that come along with them. As a founder it is important to meet and connect with other founders at events going on in your community. Meetup.com is a great place to find out what events are going on in your town, and as a founder you should be going to at least two events a week. Other resources are:

CoFoundersLab
Startup Weekend
Lean Startup Machine

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

 

Milestones That Friends, Family, and Founders Care About Before Investing

Seed Stage Milestones from The Startup Garage

Milestones That Friends, Family, and Founders Care About Before Investing

The most important principle of startup fundraising that every entrepreneur needs to know is: raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment. As a startup with zero to very low revenue, your friends, family, and cofounders do not expect you to have achieved very many major milestones. Nonetheless, there are a few key milestones that you will need to achieve in order to get them to sign over the check.
 

Business Plan

Ideally, you will have a business plan with complete market research and a financial model. You will need demonstrate the product, its advantages, who the market is, how the business will run, capital requirements, and financials demonstrating the financial model. If your product is not developed, you will need some sort of mockup.
 

Personal Investment

Investors at any stage like to see that you have committed personal funds in addition to sweat equity. First, if you aren’t willing to assume any of the risk, neither will investors. Additionally, by putting some skin in the game you are showing your commitment to the company.
 

Capital and Milestone Timeline

Part of your pitch documentation needs to be centered on your capitalization strategy. You will need to reverse engineer a timeline of capital infusions based on the key milestones that you will achieve with each round of capital. You will want to demonstrate this timeline and the strategy behind it as well as the effects of accomplished milestones on the company’s future valuation.
 

Market Validation

You likely will not be in a position to achieve the ideal form of market validation: paying customers. However, you may be able to secure letters of intent, customer surveys, or even customer endorsements based on mockups that you have shown them. Market validation can also come in the form of successful companies selling similar products. If none of this is possible, you will want to convincingly demonstrate that there is a real need for the product in the market.
 

Prior Success

The best milestone that you can achieve to raise your chances of obtaining friends, family, and founder funding is prior success. Ideally, you will want to demonstrate prior startup success as well as prior success with raising capital. If you are a first time entrepreneur you can demonstrate prior career success and entrepreneurial skillsets.
 

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

The JOBS Act Negative Impact on Friends and Family Funding

Seed Funding and the JOBS Act from The Startup Garage

The JOBS Act Negative Impact on Friends and Family Funding

2012’s Jumpstart our Business Startups Act, known as the JOBS act, went into effect last month encouraging entrepreneurs and exciting the startup community. This act intends to increase jobs by making it easier for businesses to raise money to grow and expand their operations. One provision of the bill – the ending of the ban on “general solicitation” – can be seen as a breakthrough, but in some ways, it is actually restricting funding sources for new companies.

Many entrepreneurs and small companies first turn to their family and friends for donations and support when launching a business. It is also a smart way to get feedback from people you trust and a great starting point before you approach investors on a larger scale. This JOBS act provision makes it so that once a startup approaches accredited investors (based on $200,000 annual income or more, or $1 million net worth excluding a personal residence) the family-and-friend funding source is then banned.

The entrepreneur can still approach family and friends, it just needs to be at a much earlier stage. Once emails or online posts sound like fundraising campaigns, it becomes general solicitation. The two can’t occur concurrently. Another uncomfortable position is qualifying if your friends and family are actually “accredited investors.” This requires 3rd party verification from a combination of IRS forms, bank statements, consumer reports and written confirmation from brokers, attorneys or CPAs. Investors at a friend and family level may be unwilling to supply such personal information. Legal experts still consider this a grey area and advise founders to limit the paper trail of funding discussions with friends and family. Based on recent national security and NSA headlines, it would be safe to steer clear of this topic in any online communications.


Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

Raising Startup Capital Through Convertible Debt Financing

Convertible Debt Financing Capital from The Startup Garage

Raising Startup Capital Through Convertible Debt Financing

Most startup founders do not have enough capital to launch their companies and need to raise money at some point. The first milestone in a new startup’s financing is called ‘Seed Capital’ which refers to the initial investment raised by the founders from their friends and family, or commonly referred to as FFF (Friends, Family and Founders), who mostly use their personal assets. It is used to cover initial expenses until the company is able to attract the attention of venture capitalists. FFF investing is not a short-term play and mostly investors do not get a return on their investment immediately. The return only happens when there is an exit via acquisition or an IPO.

 

Raising Angel Capital

Individual investors who provide financial funding to startups are called ‘Angel Investors.’ Angel investors may invest individually or as part of an angel group, which are usually local organizations made up of Accredited Investors*. Some well-known Silicon Valley angel groups are Band of Angels, Sandhill Angels, TIE angels and others.
Per SEC rules “accredited investors” need to meet one of the following criteria:

1. Have an annual income of $200,000 or more per year for past two years (if married, $300,000 jointly with spouse) with a reasonable expectation of the same income level in the current year or

2. Have $1,000,000 in assets excluding the value of their primary residence.

*The above definition of accredited investors is being currently reviewed by the SEC in terms of current financial thresholds of income and net worth.

Convertible Debt Financing

Since investment in a startup is risky and most people are reluctant to contribute funds, startup entrepreneurs can use different ways to make funding from FFF look less risky. Among the most common methods of funding used by startups when raising seed capital is “Convertible Debt Financing.” “Convertible Debt” is a loan, which is automatically converted to equity at maturity or upon the closing of a round of financing. Convertible debt must have interest rates at the Applicable Federal Rates (AFR) published by the IRS monthly at AFR Rates. Bridge notes/loans are an example of convertible debt. Convertible debt provides startups with a relatively easy way to procure financing. Various terms such as price cap, discount, conversion to equity, etc., can be incorporated in the agreement at the time of financing.

Pros and Cons of Convertible Debt

Pros of convertible debt:
• Startups have to pay simple interest and not compound interest.
Cons of convertible debt:
• On maturity both accrued interest and principal are due.If maturity date is reached and the startup is unable to secure a round of financing, note holders can force the startup into bankruptcy.
• With many investors and many notes with different maturity dates in a seed or a financing round, calculating interest payments can be time consuming and complicated.
Example: An angel investor contributes $300,000 convertible note to a startup. The terms of the note are 10% discount and an automatic conversion after a financing of $1,000,000. (Note: The discount is appropriate as it is a reward for early investors to invest in a startup, which has zero or little funding). Let us assume there was a financing of $1.5m and the share price is $1 for the current round of funding.
While others get share(s) for $1, the angel investor gets it for $.90 ($1 * 90%) since there is a 10% discount. Shares received by angel investor for $300,000 investment = $300,000/$0.90 = 333,333 shares.
Return on investment = ($333,333 – $300,000)/$300,000 = 11%.

In addition to convertible debt, other methods can be used to pay back FFF such as:
1) Fixed repayment schedules tied to company’s future cash flow(s)
2) Giving equity in the company
3) Giving non-voting stock

NOTE: Angel investors are typically allocated common stock, the same class of stock as owned by founders, as opposed to preferred stocks, which are offered to VCs.

Arushi Bhandari, CPAAbout The Author

Arushi Bhandari, CPA, MBA blogs regularly at www.startuptaxaccounting.com. She recently published an ebook with insights about the impact of JOBS Act & Dodd Frank Act on startup funding, terms like angel, accredited investors, venture capitalists, stock options, Restricted Stock, RSUs. It gives in depth examples & templates explaining documents like Term Sheet, Cap Table, Convertible Securities plus the importance of 83(b) filing.

 

Links to Download Arushi’s eBook
Apple iBook: STARTUP Financing, Equity and Tax
Kindle edition STARTUP Financing, Equity and Tax

Startup Funding Preparation: Approaching Friends and Family

Seed Funding Preparation from The Startup Garage

Startup Funding Preparation: Approaching Friends and Family

Starting any business will require some initial capital, even if only to register the business. Most startups will have additional expenses to develop the product or service, acquire a physical location, pay employees, market the business, etc. Unfortunately, angel investors and venture capitalists are rarely interested in funding a company at this stage.  There are many reasons why they don’t fund companies  early on, one of which is because the amount of capital that a company needs at this stage typically ranges between $15,000 to $40,000, much less than what these investors want to invest.
 

Startup Funding Options

This leaves startups with two options, obtain a loan or get funding from friends, family, and/or founders. Obtaining a loan can be difficult as the business does not have any assets.  Not everyone wants or is eligible to obtain a business credit card.  Friends and family are often a good alternative for entrepreneurs in this stage and their funding can come in the form of a loan or in exchange for equity in the business.  Lastly, many entrepreneurs seek out a co-founder who can come on board to finance the business’ initial expenses and bring on expertise that the original founder may lack.  In any case, an entrepreneur will need to prepare some tools to help them pitch their idea to their friends, family and/or potential founder.
 

Startup Funding Business Plan and Pitch Materials

Before you begin asking friends and family for a loan, it is imperative that you have put in the time necessary to write a business plan. Even when a business plan is not completely necessary to receive a loan from your friends and family, we believe it is a moral obligation to go through the business planning process in order to protect the investors’ money.  At the minimum, you will need some form of documentation to help pitch the idea, whether in the form of a written document or a presentation.  Your documentation should clearly portray your product and/or service and it should include two main points: 1) what problem in the market does the product/service solve; and 2) why does the product/service solve it better than the competition. It may be helpful to examine who the competition is, their pricing, their main features, etc. You will want to identify your target market, state why this market is attractive, and ideally, quantify the size of the target market. You will also want to demonstrate your sales and marketing strategies for gaining your target market’s business. Next, you want to demonstrate who will run the business and how the business will be run. You should also be prepared to provide some simple financial projections. These should include projected revenue, the cost of your product/service, operating expenses, and profit. You should show how the business will grow overtime and demonstrate the drivers of that growth (i.e. hiring a sales rep, growing the marketing budget, etc). You can wrap up your presentation by showing how much capital you need to raise and what it will be spent on. Lastly, you may want to develop a contract outlining the terms of the agreement or at least be prepared with some ideas of potential terms that you would like to discuss.

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.

Drawbacks of Startup Funding From Friends and Family

Friends and Family Drawbacks from The Startup Garage

Drawbacks of Startup Funding From Friends and Family

Part 2 of the two-part series considers the potential drawbacks of raising startup funding from friends and family. Part 1 detailed the benefits. Most of the drawbacks relate to interpersonal issues that can occur. It is important to take the business relationship seriously. Be transparent about the risks, lay out the business plan for the money they provide, and get everything in writing. If you can invest your own personal finances first, friends and family will be more willing to match your contribution.

Pressure

It takes a special pair of people to not let money get in the way of their relationship, and there is no exception when it comes to borrowing for business. There is always a risk of losing longtime friends or straining family relationships if your startup fails (which 90% of tech startups do) and you are unable to pay back the money loaned to you. Each party should go into the deal professionally and be aware of the potential risks involved with the investment. Make sure the investor is financially secure and understands that they potentially may not see the money again.

Benefits Beyond Funding

Friends and family usually bring nothing more to the table as an investor besides the initial capital.
Investors can give you business advice whereas family and friends may not be able to. Investors can give guidance along with money since they have experience working with startups.

Lack of Clarity, Meddling, Whose In Charge?

Often friends and family do not realize how risky startups can be. They want to support you, but sometimes do so because they expect to make a lot of money from your business. It is important to extremely formal and ask your business attorney to draw up documents on what your friends and family should expect to get out of this investment, as well as all the loan details.

Friends and family frequently have an extremely limited ability to evaluate the potential of your business, though they tend to give advice because of their monetary stake in the company.
With these types of loans it is possible that the friend or family member may feel that they have a right to make business decisions and put their two cents in. If it becomes an issue, you have to remind them that the loan did not buy them a stake in the company and that you will be in charge of the daily business operations

No Credit Reporting

If you get a loan from a family member or friend, it is not reported to the credit bureau. Even if you paid your loan back as agreed upon, your credit score will remain the same, making it just as difficult to get a loan from the bank.

Want To Learn More?

ebook-capital-raising-from-fff

Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.