
Friends and Family Funding and Why I'm Dreading Thanksgiving - bscordato
http://datodaily.tumblr.com/post/68087290627/friends-and-family-funding-and-why-im-dreading
======
emhart
This is an anecdote, not a great insight, so feel free to skip:

When I was starting a small theater company in NYC with some friends we raised
money for our first off-off-broadway ("broadway", "off" & "off-off" are a
definition of seating capacity, btw, not geography) show, we turned to friends
and family for our funding. This was very much the norm when you were just
starting out. Usually these were small amounts, aiming to raise maybe 5-7
thousand dollars total, often even less, all depending on location & run of
the show.

Anyway, we raised a few thousand, put on a great show of original one acts
from writers and directors in our own company and it was shockingly well
received. In the end, we actually managed to turn a few thousand dollars
profit, which was less typical. In the meetings we had afterward with what to
do with the money, everyone but myself and one other partner were blatantly
treating it like a lottery win. A completely unencumbered windfall with which
we could just buy beer for a year if we wanted. It was infuriating.

For me, and the other partner (who both left the company due to these and
related issues soon after) we felt that while we may not owe that money back
to the family that supported us, we at least owed it to them to keep it
rolling. Instead, we rented out office space on 42nd street for ~6 months and
never did anything more than use it as a storage unit. Most expensive storage
unit you could find in the city.

Finally, the time had come to put up our next show, a full-length new work by
one of our best writers, and with absolutely 0 compunction 7 of the partners
enthusiastically recommended we return to the friends and family well. There
was nothing left of our profit and no one cared. After the first show we had
enough to mount the second, had we just set it aside for that purpose.

That was my first real experience in small business and unfortunately I was
too young and angry to properly learn those lessons at the time. Took me
another 8 years to really comprehend what we had done.

Edit: Faulty memory, updated for accuracy.

~~~
gohrt
Did you repay 0% of investment, or 100% of principal with 0% interest? The
former is awful, the latter is a bit less awful.

~~~
emhart
0% it is awful, but at that scale, it is very frequently how things are done.
The other common off-off-scale money raising method is to make your actors
agree to take responsibility for N# of tickets per performance, so they either
sell them, or it comes out of their pay if they can't. Lot of pestering
friends to buy tickets to your shows. I was never willing to work for a
production that did that, as I wasn't comfortable mixing the work with sales
in that way, but in asking for money from friends and family, I don't know
that investment was the proper word.

In addition to asking for money from family, I also filed grant applications,
and both were treated similarly. None of the people giving had any expectation
of a return, but I think they similarly had no expectation that they would
ever be asked again, or that we would squander profits as we did.

------
PhasmaFelis
I'm still trying to wrap my head around the idea that there's a world out
there where you can just casually hit up Grammaw and Uncle Barry for twenty
grand apiece.

It doesn't really favor the notion that the startup world is an egalitarian
meritocracy.

~~~
rayiner
"Egalitarian meritocracy" is relative.

It used to be that going to Harvard was largely a measure of whether you had
enough money to go to Harvard. In 1950, the acceptance rate at Harvard from
elite preparatory schools was almost 90%.

Today, it's an "egalitarian meritocracy." The acceptance rate is around 5-6%.
A quarter of students come from families that make below $80k, and 60% of
students receive some financial aid. In other words, a household income of
$80k, which is top 30% nationwide, puts you at the bottom 25% mark at Harvard.
Further, 40% of students apparently come from households making over $180k
(the point at which aid phases out), which puts them in the top 5% or so of
households nationwide. The statistics at Princeton, Stanford, etc, aren't any
different.

People in the start-up world talk about "egalitarian meritocracy" in the same
breath as they say they give explicit preference to kids coming out of
Stanford, a place where the median person is from the upper middle class. It's
true in a purely relative sense. It's very meritocratic compared to how things
were historically, and how things still are in many parts of the world.

That is not to say that these institutions could be appreciably more
meritocratic by their own efforts. Rather, when talking about whether a field
is "meritocratic" you can't ignore the fact that class and income-based
sorting takes place at a much earlier stage in the pipeline.

~~~
natrius
If merit correlates with the ability to make money and merit is heritable,
you'd expect those with merit to come from families with money. Top schools
and our industry are probably far from pure meritocracies, but that data
doesn't prove (or even strongly suggest) it.

~~~
amirmc
> "If merit correlates with the ability to make money and merit is
> heritable..."

In the UK this was called being of 'good breeding'. It's no more true now than
it was back then. Bear in mind that money is also heritable.

~~~
natrius
Your claim that it isn't true is nice and all, but actual evidence that it
isn't true would be better.

~~~
Brakenshire
Just to clarify, you're asking him to prove that the rich aren't genetically
superior to the poor?

~~~
natrius
To quote myself: "If merit correlates with the ability to make money and merit
is heritable, you'd expect those with merit to come from families with money."

Is my logic incorrect? Does merit not correlate with the ability to make
money? Is merit not heritable? None of those questions have been answered, but
we did get to see some good ad hominem reasoning.

~~~
PhasmaFelis
> _Is my logic incorrect? Does merit not correlate with the ability to make
> money? Is merit not heritable?_

You're using the word "merit" in an impossibly vague and poorly-defined way.
You might as well say that having a sweet tattoo is a merit when picking up
dudes/ladies, and merit is heritable, therefore sweet tattoos are heritable.

And, again, you're the one making extraordinary claims, so you're the one who
needs to provide extraordinary evidence. I would genuinely love to see it.

------
rayiner
Relevant:
[http://thinkprogress.org/election/2012/04/27/473096/romney-b...](http://thinkprogress.org/election/2012/04/27/473096/romney-
borrow-money-parents).

Although it is a weird dichotomy if you think about it. People let parents pay
for their college to the tune of $100k+ and don't feel any obligation to
justify or defend the investment.

~~~
fiatmoney
"College" is in this case a proxy for "entrance to the socially-defined middle
class". Parents in general (or at least the middle-class ones that would have
money to lend/give for college) want their children to be at least as high in
the social hierarchy as they are.

Financing someone's business is much more of a mercenary decision; "do you run
your own business" isn't really a social class marker in the way "did you go
to college" is. It's strictly for the money (or for some, a kind of
consumption in the form of a "hobby business" that doesn't actually make
money).

~~~
001sky
The purpose of borrowing from your parents is different, though. The transfer
of wealth from parent to sybling via "paying for" college is (as you rightly
point out) not really a loan, but a type of "grant". More specifically, its
one that is both socially acceptable and tax beneficial[1].

The logic of Romney's positin on borrowing is that it is <market efficient>.
That is to say, the parent has more information on the borrower than a bank,
and therefore is in a better position to measure risk and avoid the typical
market failures that correlate with the type of non-stochastic uncertainty
that cling to first-time founders with no track record[2]. Your parents have
much lower information gathering costs and monitoring costs than a bank, in
other words. Also, since the return on the investment can be _higher_ than
what that money would otherwise get in a normal debt investment, the idea
would be a win/win also in theory for the parents. This is, even with a true
debt structure (ie, repayment with interest) which is again different from the
way many parents 'pay' for college.

[1] Gifts over 10k are taxable.

[2] This is not technology risk, which is a different ball of wax. This is the
risk that would keep a bank lending you money for a low-tech business, like a
lemonade stand.

~~~
sokoloff
Ref: 1: Assuming US law, the annual gift tax exemption is $14K (per [giver,
recipient] pair, so a couple may gift $28K to a single recipient, or $56K to
another couple), there's a process to combine 5 years' worth at once, and
amounts over the annual exemption limit count against a lifetime exemption and
then are taxable to the donor.

I can't fund any ordinary circumstance under which a gift would be taxable to
the recipient.

[http://www.irs.gov/Businesses/Small-Businesses-%26-Self-
Empl...](http://www.irs.gov/Businesses/Small-Businesses-%26-Self-
Employed/Frequently-Asked-Questions-on-Gift-Taxes)

~~~
001sky
Thanks for the updated info, this was traditionally conformed to the $10K
level with money laundering. The student would not be 'in business' so it
would be taxable at the level of the parent only (no business entity), and not
be booking the gift as income presumably (no employment or services
renedered). I'm not sure if the married parents are each able to gift out of
the estate or not, again this may have been revised.

------
7Figures2Commas
> I’m deep into my second pivot, and haven’t yet delivered an exit two years
> after that initial money.

Haven't delivered an exit after two years?!? What's wrong with you?!?

Sarcasm aside, while taking money from friends and family may not always be
desirable for a variety of good reasons, the problems that arise from it are
usually the result of unrealistic expectations.

Most companies _never_ achieve an "exit", the average time to a liquidity
event for companies that do is well more than a couple of years and most
liquidity events don't produce Hamptons money for everyone involved.

If you have raised capital from friends and family and are sweating bullets
after two years because you haven't made yourself and your investors wealthy,
the expectations you set for yourself and your investors were way, way off.

~~~
wdewind
I don't think he means exit in the sense of IPO or sale to PE. I think he
means exit for his initial f&f investors. It's not entirely unreasonable to
expect a larger seed round or even a series A after 2 years.

~~~
7Figures2Commas
A professional investor (or group of investors) providing a seed or Series A
after a couple of years is realistically going to have little interest in
cashing out existing friends and family investors at a gain. At that stage,
you're investing to grow a nascent business, not to buy the founder's mom and
dad a deluxe new kitchen.

~~~
001sky
Yes, this is right. An angel or early investor should not be <expecting> any
capital return until a proper exit. Especially if that "return" is coming from
incremental capital being raised by the startup. Later in the game, when the
business is de-risked and there is more demand for the company than shares to
be sold, things may be different. This is why you see late-stage mezzainine
investments that might take out early investors before an IPO. That is merely
because those guys are momentum players, and the original investors' work in
taking the actual risk of the business has been already done.

------
xrd
I took money from friends and family. I would not do it again.

Most of my investors were well meaning. And, their expectations were often set
by what they read in the media. I had one investor dream that he was a
millionaire, and was initially very upset when we sold for a lower valuation
than his investment valuation, and did not understand why he was not receiving
all of the purchase funds rather than an amount based on his ownership share.
There was a generally poor understanding of investment and this was hard to
explain to a friend. Angels, supposedly, know that they will probably lose
their entire investment, while F&F almost never think that, nor can they
afford to.

Of course there are pros and cons of each type of investor.

The thing that would have me hold off from taking investment from friends &
family would be that they often cannot to bring anything other than money to
the table. If you read about Ron Conway, for example, you'll see he brings
money and his whole being (connections, advocacy, etc.) when he invests. This
is a big deal. F&F investors intend to do this, but they are as different in
this way from "real" investors as growth hackers are from government workers.
They don't know how to build businesses, and don't have much other than more
opinions, generally.

And, if you have a family member that does not fit this bill, then by all
means, take them as an investor.

------
segmondy
Well, next time, don't raise money from Friends and Family. Raise it yourself.
Work for a few years, gain experience, live frugally and save. Then bootstrap
with your own money, starting with your own money will really have you think
harder than with other people's money.

~~~
socialist_coder
I've always suggested this as well. But the truth is, almost everyone is too
lazy and doesn't have enough financial discipline to do this.

FWIW I've been bootstrapping my startup for the past year and we're finally
making a profit.

~~~
a8i
If you're a single, early 20s engineer in silicon valley, it's nigh on trivial
to sock away ~40 k$ in a year.

That's easily a year's runway for yourself, or half a year with a cofounder.

~~~
socialist_coder
Tell that to all the late 20s / early 30s engineers whom I've tried to recruit
who have no savings.

------
sbank
I would never take funding from friends or family. Hard rule. More aspiring
entrepreneurs should listen to Ten Crack Commandments by Notorious B.I.G. at
least once.

~~~
aestra
Good advice from the Notorious B.I.G. minus the homophobia.

 _Seven: this rule is so underrated Keep your family and business completely
seperated Money and blood don 't mix like two dicks and no bitch Find yourself
in serious shit _

------
dlnovell
TL;DR - "This rule is so underrated, keep ya family and business complete
separated"

~~~
sbank
Commandment one, two, six, as well as number ten (when translated to the
current context) is also solid advice.

------
jheriko
thank you.

I'm constantly bugged by the level of privilege amongst the startup crowd. Not
even just being able to borrow from family, but being able to rely on them, or
friends as something to fallback on when it all goes wrong.

There are a lot who seem to be seeking investment and I really don't get it.
If your idea needs money then go make money... or don't be so selfish and take
the risk and illuminate someone who does have the money. (hint, how dare you
ever complain about patents when this is your attitude)

For me not having money rules things out. Borrowing that money to take a risk
/is stupid/ it just is - even if it pays off - success is nothing to do with
intelligence, sensibility or even doing anything right necessarily. I simply
never enter into such an arrangement, nor does the thought realistically
warrant consideration - I might lose my home and the few meagre possessions I
have - along with an enjoyable lifestyle - if I screw up.

------
albedo
This is part of what we were trying to avoid while starting Lambda
([http://getlambda.com](http://getlambda.com)). Do contract work to bootstrap
your company, especially for technical founders. It's very much worth it to
take 1-3 months off to freelance, make ~$20-50k, and keep your entire company.

~~~
ereckers
I'd say making $20-50k for 1-3 months of freelancing may be just enough to
make me want to ditch the startup altogether.

~~~
albedo
Yes, freelancing is very lucrative, if you're a good developer with the right
skillset. People are generally willing to give up a lot of money in exchange
for a steady income guarantee.

~~~
phamilton
"a steady income guarantee" plus access to good mentorship/infrastructure/etc.

Having done both, I find there's a level of engineering growth that you miss
out of by doing freelance work. Most freelance work won't involve supporting
millions of requests a day. There's value in that exposure.

------
macspoofing
>I’m deep into my second pivot, and haven’t yet delivered an exit two years
after that initial money ...

>I’m confident I will (deliver an exit) - I bust my ass every day - but I
haven’t yet.

That confident are we?

~~~
bscordato
If I wasn't I wouldn't be doing it :)

~~~
macspoofing
I'm sure you are.

... but maybe you should consider scaling your expectations.

------
kumarski
My dad came to the states with 8 bucks in his pocket and not speaking English.
He was nearly deported twice and went to Mexico and then Canada finding random
agricultural work before returning.

When I started my small business, even with customers in the queue, I didn't
have the heart to ask him or anyone else in my family for funding.

I remember hearing stories about 'Patels' who came to the USA. The small but
robust tribes of Indian(not Native American) families in each community would
then each fork over $1000 to the new family for the purpose of starting a
business(hotel or convenient store). One of the older families would then
coordinate payments and ensure the new family made payments back to the
loaners. It was a zero interest loan.

I'd rather eat macaroni and eat canned food for a month than consider asking
mom and dad for money.

------
rajbala
You don't have to raise money from friends and family to have Thanksgiving
become "Thanksgiving plus a 20 minute board meeting."

All that's required is that your family know you're in the throes of starting
a company and suddenly you'll get lots of questions some perhaps hard to
answer.

~~~
vertis
There are hard questions: Are you sure this is going to work?

And then there are hard questions: Am I going to get my money back?

------
jliptzin
On the flip side I've seen close family and friends angered at not being given
the opportunity to invest in a successful startup, the opportunity instead
handed over to "strangers."

------
ef4
I'm going to disagree and point out that all the horror stories always include
people _also_ breaking the regular old cardinal rules of investing. Whether or
not they're friends & families has very little to do with it.

Don't raise a bunch of money from a crazy person with unrealistic
expectations. Don't fund a business you don't understand. Don't invest money
you can't afford to lose. Don't do business with people whose character you
can't count on in good times and bad.

Now, obviously you need to not let your emotions blind your judgement so you
can actually follow these rules, but that's _always_ true, whether or not its
family. And there's a very good reason to consider family deals: you have deep
insight into the psyches of the people involved. (Or if you don't, you're
probably not cut out for this kind of investing in the first place.)

I have a lot of friends and family I would never do business with, because
they don't fit the criteria. But I also have people I would fund in a
heartbeat, and I've done it happily.

If you're the investor, it comes down to accurately judging yourself. Can you
_really_ put relationships ahead of money?

If you're the startup, you need to judge the investor by that standard. Are
they truly mature enough (and wealthy enough) to honestly not give a fuck
about that money if they never see it again?

------
sturgill
I turned down friends who wanted to join our raise at Goalee for this exact
reason. That, and I wasn't convinced that they were fully aware that you only
invest in a small start-up what you can afford to lose. They guy was getting a
doctorate in piano performance, and I didn't get the sense that they had a lot
of extra in their lives (especially considering their three kids).

Best decision I ever made.

------
ansontl
Friends and family funding is indeed very common in startups and small
businesses. Over 40% of businesses started from borrowing money from friends
and family. The rules are very simple: 1) make sure they can afford to lose
the money; 2) have a formal agreement and make it professional, set the right
expectation, and communicate the risks upfront; 3) keep them informed on your
business status, give them regular updates regardless whether it's a good or
bad news. Even though this sounds easy, the actual fundraising process can be
very tedious. You can get a lawyer to help you but that will cost you a lot of
money. The best way is get use the tools online, like
[http://kickstarter.com](http://kickstarter.com), or this one
[http://trustleaf.com](http://trustleaf.com) which is specialized in friends
and family funding.

------
bowlofpetunias
There's a reason why this kind of funding is generally referred to as
"Friends, Family and _Fools_ ".

------
asah
Thanksgiving wouldn't rank on my top 100 considerations in starting or not
starting a company.

-adam (6 startups, 3 IPOs, #7 on the way, bbfdirect.com, ask me about killer snacks for your office)

------
Aloha
Don't ask your family for money, ever. You'll pay for it in grief 1000 fold
over every time you see them in perpetuity.

------
snoldak924
I think it depends on the difference between an "investment" and a "gift."
Similar to loan vs. grant.

------
robodale
That smelled like a sales letter.

~~~
sejje
I didn't catch a whiff of that.

I have no idea what business he's in, after reading the article.

------
the_derelict
> I’m confident I will - I bust my ass every day - but I haven’t yet.

Busting your ass isn't going to make a bad idea any better. I took a look at
your lobster schtick and think you need to go back to the drawing board.

~~~
beat
Two years isn't enough to judge whether an idea is bad or not, either.

------
goggles99
WOW, really?

Startups come and startups go, but family you will always have (unless you
blow all their money in a failed startup)

This is a very bad idea.

