Pros and Cons of Seeking Funding from Family Members

[Monirul Islam]

The one thing that holds most entrepreneurs back from breaking from the pack and starting their own businesses is money. Most people who work a 9-to-5 and have debt to pay simply cannot amass enough capital to successfully launch a business. Taking out a loan from the bank is risky and lands you even further in debt. Angel investors and venture capitalists are another option, but these professional investors will swallow amateurs whole without spitting out the bones if you disappoint them. That brings us to seeking funding from family members - the most obvious choice which most prospective entrepreneurs will cringe at picking.
The Pros
There are many benefits in receiving funding from family members. First, you know them better than other prospective investors, therefore you should know if your idea appeals to them. In addition, you will be far more at ease presenting your idea in a honest light to family members than professional investors. You know their income and the amount of money they can afford to invest. If they become majority shareholders, you can be reassured that the company will stay in the family and be relatively safe from a takeover (hopefully). If your business profits, you increase your family's affluence. Family members won't complain about overtime and short-term profits - after all, they are family and they are invested for the long run (hopefully).
The Cons
The disadvantages are obvious - can you afford to lose your family's money? Handling family money is much harder than handling investors' money - the line between your personal and business life becomes non-existent. Your overall familiarity with your family can also cripple your professionalism - both you and your family will likely violate professional boundaries. For example, a professional investor may only require a monthly status report for your business, but a family member may end up calling you every night if they are worried about their money. Family members may also overstep their bounds by trying to co-manage the business with you and attempt to oversee and change your business operations. Family members who are invested in your company may also seek executive positions in your company for which they are not qualified.

Considerations
If you are set on requesting funding from family members, you need to set up boundaries at the beginning. Have a lawyer draft up documents to clearly dictate their roles as investors, and their privileges. Clearly present your company's business plan and long-term projections. Offer solid fiscal targets that they can look forward to achieving. Explain clearly that, as with any investment, they can lose all of their principal, and that you cannot be held accountable if this happens. Make them sign as many documents as it takes to eliminate these loopholes. Make it clear to your family members that they will be treated as investors, and not as family members, and distinct lines will be drawn between your personal and business relationships.

Source: http://www.businessdictionary.com/article/453/pros-and-cons-of-seeking-funding-from-family-members/