Background

Friends, Family & Founder

Friends, family and founder; these are the three starting points for most start-up businesses who are looking to secure funding. Often this takes the form of debt but in some cases, equity can be offered in order to help the company with cashflow in the beginning stages.

 

For founders, this will be the initial equity put into the business on incorporation. Further funding can be provided and serviced using a director’s loan account, which is a form of debt that the business owes to the director (who is usually the founder at the beginning stages).

 

Friends and family can be offered equity depending on how much their input will be, however, if they are to be a sleeping shareholder, this amount will not normally exceed 5%, and will almost always be a minority stake.

 

This investment will hopefully only be required at the start and whilst it is important to keep these investors involved, they wouldn’t be expected to be involved in the day-to-day running. They should understand, that the value of their investment could be lost, or that it might take longer than anticipated to be able to get a return in either a dividend or the investment back.

 

The return on their investment could be dependent on future funding, be it crowdfunding or the subsequent sale of the business, at which point a value will be determined. Share-holder agreements are important when it comes to selling a business, so document and keep safe any share records.

Typical Investment Size: £1K-£10K

Stake: Around 5%

Involvement Timeframe: 5-10 Years

ADVANTAGES

DISADVANTAGES

 Obtaining this type of investment is usually quite a quick and low-cost process with little due diligence

This cash is usually used to help kick-start the development of an idea in order to make it revenue-generating

Reduces the equity held by the founder

There is normally a lack of involvement by these investors, and usually, equity given away in this method is equity that can’t be given away to other more involved investors

PLEASE NOTE:

This document is intended to be an aide-mémoire to help you consider different forms of finance and which ones might be appropriate for your business; it is not a comprehensive guide to all forms of finance. There could be different tax and legal implications associated with different forms of finance. Professional tax and legal advice should be sought to prepare for these different forms of finance.