Startup Funding – the Friends and Family Round

Basil Peters is a Techvibes Guest Contributor.

Over 90% of successful tech companies are financed in pretty much the same way:

  • Startup funding from Friends and Family investors, then
  • Angel Investors and Angel Funds, followed by either
  • Venture Capital, or
  • Public Venture Capital

The Friends and Family financings are always the easiest to complete – often taking less than two months from start to finish. Friends and Family rounds usually raise $25,000 to $150,000 in total – the amount depends a lot on who your friends and family are. The only problem is that most people who invest in Friends and Family financings probably shouldn’t. Even worse, well meaning but inexperienced, entrepreneurs often treat their friends and family investors unfairly, and cause considerable damage to their startup and future funding opportunities. The entrepreneurs don’t do this intentionally – it’s most often just a by-product of entrepreneurial enthusiasm.

The most common way entrepreneurs get into trouble and end up treating their friends and family unfairly is by over-valuation. This causes serious structural problems that must be rectified before the next round of financing. Some of the ways to avoid this common mistake, and to fix it if necessary, are described at this link on startup funding valuation. All financings and share sales are governed by securities legislation. Entrepreneurs must know what the legal requirements are before accepting that first dollar of investment, even if it’s from a family member. An outline of startup funding legal requirements is available here. More information on startup funding can be found on AngelBlog.