What do I tell my friends and family interested in investing in my startup?

Should I take money from friends and family?

Often, yes. For many founders, especially those without a network of angel investors, friends and family money is what turns a side project into a company. It can pay for a prototype, a first hire or the months it takes to quit a day job. And people who know you are often more patient than strangers.

The risk is to the relationship. If the company fails, a lost investment can strain a friendship or a holiday dinner. If it succeeds, relatives who didn’t invest can feel left out. Take the money only from people who understand what they’re doing, can afford to lose it, and will still be glad they backed you if they do.

What should I tell them about the risk?

Have the conversation before you send any documents. A short script covers the essentials:

• You could lose all of it. Most startups fail, and in a failure, early investors usually get nothing back.
• It will take years. There’s no dividend and no way to sell. Money comes back only if the company is sold or goes public, which usually takes many years if it happens at all.
• You won’t have a say. Investors don’t make decisions about the company. That’s the founders’ and the board’s job.
• Here’s how I’ll keep you informed. Tell them how often you’ll send updates, and then do it.

Then put the same points in writing. Ask them to take a few days to decide. If they hesitate, treat that as an answer.

What instrument should I use?

Use a post-money SAFE, the same form and the same valuation cap as everyone else in your round. A $25,000 check from your uncle deserves the same paperwork as a $25,000 check from an angel. Consistent documents keep your cap table clean and avoid hard feelings when the SAFEs convert. If you haven’t agreed on a cap with anyone yet, Y Combinator’s MFN SAFE can work for a few small early checks. See SAFE and Valuation Cap.

Avoid the common mistakes: a handshake, an email promising “a few percent,” or shares issued informally. Each of these creates a claim you’ll have to clean up before your next round, often at a worse price. Set a minimum check size, often $10,000 to $25,000, so the paperwork and the cap table line are worth it for everyone.

Should it be a gift, a loan or an investment?

Decide on purpose. A gift has no strings and no expectation of return, though a large gift can have tax consequences for the giver, so they should talk to a tax advisor. A loan must be repaid whether the company succeeds or not, which puts the risk on you. An investment on a SAFE shares the risk: the investor wins if the company does well and loses if it doesn’t. Don’t blur them, for example by calling something a loan you never expect to repay.

Do they need to be accredited investors?

Generally, yes. Most startup rounds rely on an SEC exemption that limits investors to accredited investors. An individual qualifies by earning more than $200,000 in each of the last two years ($300,000 with a spouse or spousal equivalent), by having a net worth over $1 million not counting their home, or by holding certain securities licenses. Each investor confirms which test they meet in a short questionnaire.

There is a narrow exception for up to 35 sophisticated non-accredited investors, but it requires disclosure documents and financial statements that rarely make sense for a small check. See Can My Startup Raise Money From Non-Accredited Investors?

What if they don’t qualify?

You have honest options. Thank them and decline for now, and offer another way to help, like introductions or early feedback. Or an accredited family member can invest in their own name, with their own money. It must really be their investment, not a stand-in for someone who doesn’t qualify. If many supporters want in, a Regulation Crowdfunding campaign may fit. See Equity Crowdfunding.

Does it matter if the investor is my spouse?

Treat a spouse like any other investor: same SAFE, same cap, same questionnaire. Joint income or joint net worth counts toward accredited status. If you live in a community property state, your spouse may already have an interest in your own shares, so ask your lawyer whether you need a spousal consent as well.

How do I keep friends and family informed?

Send the same regular update to every investor, family included, at whatever schedule you promised, often quarterly. Share the bad news with the good. Investors who hear about problems from you, early, stay supportive. And keep business out of family events unless they ask. See How Do I Update Investors in My Startup?

Go deeper: For a full walkthrough, see our Founder Guide to SAFEs.

If you’d like help setting up a SAFE round that includes friends and family, see our SAFE services or contact us.