Attorney Kevin Vela, a founding partner at Dallas-based law firm Vela/Keller who works with startups and small companies, gave the Dallas Morning News five tips for raising capital from friends and family.
1. Be professional: Treat any pitches to friends and family just like you would if you were pitching in front of an angel group or venture capital firm. Practice. Have handouts and slides prepared.
2. Tell them everything: Investors have a right to know everything about the company they are investing in. Don?t just sell them on the upside; also explain the risks and who your competition is. Use this as an opportunity to explain how you will mitigate the risks and differentiate from the competition. Make sure you let them ask questions.
3. Think through your next round: Early investments are easiest to do as convertible notes. Not only does this limit the legal work necessary, but also it sets you up nicely for your next financing round. Most startups go through two to three rounds of financing, so think through what will happen to your friends and family investors when you raise money again.
4. Paper it up: Sure, it is not always cost-efficient to get a lawyer involved for a small $20,000 investment. But remember that you are accepting someone else?s money. Consider using an attorney, no matter how small the investment. An attorney who focuses on startups should be able to help for a reasonable price. There is also an abundance of great resources for entrepreneurs and founders on the Web.
5. Keep them informed: After the investment, it?s good practice to send weekly updates to your investors. It sets a good tone and will get you ready to deal with angel and venture capital investors down the road.
Source: MCT Information Services