Accepting investment from family & friends - a good idea or not?

This is a tough one. There's an old saying that money & friendship, like oil & water, don't mix and that gets tested here. 

Accepting other people's money changes relationship dynamics. That is inevitable (and that includes business relationships).

If you thought family gatherings were awkward now, imagine what they'd be like if one of your family has invested in your idea and you spend the entire event convincing them why things are awesome (especially if they're not). 

Or at a dinner with friends, and it comes up. If you have a more affluent friend than the rest of the group, the fact they've got the funds to invest in your idea can create a wedge with the rest of the gang who don't have the means to do so. 

The other side of this is your best investor is someone who knows you, shares your belief in yourself and is prepared to back you. At the stage where all you have is an idea, the investor is investing in you and that's a whole lot easier if they already know you. 

If we focus on what questions to ask before you approach family and friends for funds, that may help give a clearer picture for what will be a unique set of circumstances every time.

Can you work with this person?

There's 3 type of people:

People who are comfortable investing in early stage ventures know that they need to spend a lot of time with the founder. This is not a passive investment for them. You're going to see a lot of them. 

OR 

Your family member or friend may want to get involved but has no experience - you'll spend a lot of time teaching them how this works, which will slow you down. 

OR

Your family member or friend just wants to support you and gives you the money. Later on when you're trying to explain what happened to it, a story that makes perfect sense to you starts looking like smoke & mirrors to them........taking them on the journey is your best bet to protect the relationship later on. 

Whichever one of the above 3 they are, you're going to see a lot of them. 

Can you treat the investment as you would with any other investor

The best way to manage finances that occur within personal relationships is to have the same level of legal rigour as you would with any other investor.

That means shareholder agreements or convertible note agreements and agreed cap tables. 

It will change your relationship. How will you manage that? 

Ask anyone who's managed an estate after the death of a close family member - money changes dynamics in relationships. Money creates expectations where none existed before. 

It may be you need to accept that this relationship (especially with a friend) will change and move to more of a business relationship. That's fine, relationships change all the time. How would you feel about that with this person? 

What happens if they want their money back?

See note above about legal agreements. It's best to set expectations on this one early. This is worth having a catchup over a coffee or lunch, whatever works for you both. Believe me, it'll be worth your time! 

What happens if they move to the other side of the world / have kids / win the lottery?

See note above about legal agreements. It's best to set expectations on this one early. This is worth having a catchup over a coffee or lunch, whatever works for you both. Believe me, it'll be worth your time! 

What happens if you fall out?

This is where the legal agreements start becoming very relevant. Your relationship has changed at this stage hence those agreements are the only way you can get an acceptable solution moving forward. 

What happens if you're enormously successful? 

That's a nice problem to have! Just remember everyone will be your best friend at that point. If your friend or family member supported you in the beginning they will ride the coat tails of that success - which is fine. It can change the relationship dynamics. 

For early stage ventures, family and friends are often your best bet, they know you best and are in a better position to take the "leap of faith" necessary to back you at those inception stages.

If you've got good answers you're comfortable with to all the questions above, it's worth looking at. If you're unsure on any of them, the time spent digging into the answer (and, in many cases, listening to your "gut") will save substantial regret later on.