Friends and Family Financing

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Wikis > Friends and Family Financing

Definition

Friends and Family Financing is the means of receiving initial investment funds from close confidants – this means friends, family members, or co-workers.

Family and Friends are great resources for startup funding because they are easy-to-find sources that already know your character and thus tend to have less stringent payback requirements. Funding from friends and family is often limited and not the sole form of initial investment, although it is known as the most common startup financing route.

Kitchen Table Pitch

An investment elevator pitch of your company geared towards family and friends is often referred to as a Kitchen Table Pitch. Compared to an elevator pitch, Kitchen Table Pitches are considered more informal in order to adapt to the pre-established relationship with the investor. These pitches are geared towards informing family and friends of your business idea; official deals and loans are not usually made during the pitch, but rather open the door towards further discussion.

Legal Issues

The IRS pays particular attention to family gifts because IRS rules state that you may only receive up to $13,000 each year from one person tax-free. Any amount over this threshold requires a gift tax return file submitted to the IRS – the giver will then be assessed a federal “gift tax” which is calculated at the same rate as an estate tax.