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. Shareholder agreements are important when it comes to selling a business, so document and keep safe any share records.