Undergoing business formation requires start up capital that some entrepreneurs worry will be hard to find in trying times. But entrepreneurs who are unable to secure funds from banks don’t have to put away their business plans.
Financial experts at Inc.com. magazine offer some tips on how to incorporate a business and structure funds from friends and family without turning away venture capitalists who could be future investors.
First, the source points out that some venture capitalists like to see familial investment in a company. It is not a bad thing to start up a company with cash from loved ones, but clumsily structuring these funds could cause problems.
To start, they advise entrepreneurs to structure friends’ investments as convertible debt. This means new business owners do not have to set a value on the company as they would with equity. This avoids diluting family’s shares in the company when new investors come along, and it looks savvy to outside investors.
Another important thing to consider is that family members need to be chosen as investors with the same care small businesses would use in choosing venture capitalists. Picking levelheaded friends and relatives who can conduct themselves in a professional manner makes it less likely that future investors will be scared off.
Many entrepreneurs may not need to turn to family for investments at all; recent proposals from the administration aim to boost microloan caps that could make it easier for startups to secure funds.