Friends and Family

WHAT

A major learning category and module of New Venture Finance

Friends and Family (F&F) funding is one of the most common sources of capital for new ventures, especially in the very early stages of the venture. Your family members and friends finance your business through gifts, loans, or debt that converts into equity in later stages of the venture's financing path. Your family and friends are willing to do this because they believe in you long before less familiar investors will, often without the expectation that they'll see their money again. If you're smart, you can turn their early investments in you and your new venture into substantial wealth as your venture grows in value. You want to get this right.

LEARNING OBJECTIVES

Students who complete this module will:

• Be able to understand, differentiate, and deal with the most common types of friends and family funds: gifts, debt, and equity. 

• Be able to use effectively the terminology and applications associated with different sources of typical early stage startup funding sources.

• Be able to determine appropriate "raise" amounts and funding partners for F&F financing

• Understand the structures of different types of financing, including loans, equity, convertible debt, and gifts.

• Know when it is appropriate to form a corporate entity when starting and engaging in financing activities.

• Know how to and when it is appropriate to convert some forms of F&F financing into entries in the startup's capitalization table.

Instructions

• Watch the assigned videos and presentations; 

• Read the assigned readings; 

• Complete the practice quiz or other assigned practice activity

• Complete the assessment;

• Complete the "Mark as Complete" checklist.

MEDIA

Slides on Friends and Family used in previous offerings of New Venture Financing (w/o narration)

and here is the activity we did on your uncle's investment

READINGS

• Founder’s Pocket Guide: Friends and Family Funding $7.99 paperback ($3.03, Kindle), ISBN 978-1-938162-11-4

Supplemental Readings

• Bygrave, W. D., & Bosma, N. (2011). Investor altruism: Financial returns from informal investments in business owned by relatives, friends, and strangers. In The dynamics of entrepreneurship: evidence from global entrepreneurship monitor data, 77-100. (Google Book chapter)

• Founder Institute, 2019. How to Raise a Friends and Family Round.

• Hacker News, 2009. Raising a Friends and Family Round? (a long-thread Q&A with the two founders of an early stage startup asking experts about F&F financing; a bit dated since Y Combinator created the Series AA and SAFE standards for early-stage documentation, but useful because you learn a lot about this specific startup's situation.)

• Kotha, R., & George, G. (2012). Friends, family, or fools: Entrepreneur experience and its implications for equity distribution and resource mobilization. Journal of business venturing, 27(5), 525-543.

• Mason, C. M. (2006). Informal sources of venture finance. In The life cycle of entrepreneurial ventures (pp. 259-299). Springer, Boston, MA. (Word doc)

• Weinberg, L. M. (2010). Pitfalls of Friends & Family, Angel and VC Funding.

Assessment - Graded Activity

Instructor will announce this as an in-class activity or an out-of-class quiz for your semester.

Mark as Complete