Throughout my transient tenure on the Nashville Entrepreneur Middle, I started listening to a brand new query from family and friends:

Can I inform you about my enterprise concept?

To their credit score, typically these people had been additional alongside:

We’re bringing in early stage capital and I assumed you’d like to listen to about it.

I’ve come to be taught that this query is loaded like a Wendy’s baked potato — and equally dense with unseen risks.

For those who’ve been requested this query, how do you’re taking off the friendship-goggles and see the chance clearly? What sorts of questions do you have to ask earlier than saying “sure”? And the way do you say “no” with out making issues awkward?

Let’s cowl what to say and do when a pal asks for an funding of their enterprise, Select Your Personal Journey-style!

1. Ask for the Elevator Pitch

If a pal or member of the family has an thrilling new enterprise, they could act a bit overzealous of their preliminary method. They could need to inform you the entire story behind the thought, how the potential is sky excessive, and the way they’ve already begun talks with VCs.

That is your alternative to set your first boundary and preserve issues skilled.

By merely saying “Hey, that sounds fascinating, let’s hear the elevator pitch,” you’re subtly nudging them to deal with you want some other skilled investor.

2. Request All of the Essential Paperwork

For those who hear the elevator pitch and suppose “Gee, they could be onto one thing right here,” the next move is to ask for the paperwork so you possibly can conduct your individual due diligence on the enterprise.

This consists of:

3. Consider the Supply As Objectively as Attainable

In terms of assessing a startup investing alternative, it should not matter if the founder is a complete stranger or your greatest pal for 20 years.

Whenever you’ve been approached with an funding alternative, even from a superb pal or perhaps a blood relative, it’s necessary to view the founder and enterprise utterly objectively. In any case, that’s how clients and different traders will see them, too.

As a result of in terms of enterprise, management is every little thing.

“An incredible concept with dangerous management is doomed. A mediocre concept with good management has a good shot.” says Adam Kahn, Principal at Unorthodox Ventures.

With that in thoughts, hear them out and proceed with warning.

4. Contemplate Whether or not the Alternative Is a Match for Your Personal Targets

A much less skilled investor would possibly ask:

“Is that this a superb investing alternative?”

A extra skilled investor will ask:

“Is that this a superb investing alternative for me and my objectives?”

Possibly your buddy has a sincerely good investing alternative, however the liquidity lockup interval is simply too lengthy. You’d slightly have that money free to purchase the bear market.

“Regardless of the motive, the probabilities that your pal’s firm goes to be a superb match in your funding technique are slim to none,” says Kahn.

5. Ask the Powerful Questions

For those who’ve made it this far, it’s time to play Shark Tank. 

That is your likelihood to begin grilling your pal. This will likely trigger some brief time period pressure in the event that they select to interpret your interrogation as an absence of religion — however a real entrepreneur will see it as an indication of curiosity.

Pay attention to what they are saying and the way they are saying it. If it appears like they’ve answered these questions earlier than, that’s a superb signal.

“I wish to ask ‘how’ questions,” says Kahn. “Decide a crucial piece of the enterprise technique and drill down as deep as potential. You do that to see how a lot of their technique is only a fairly infographic on a well-tuned pitch deck.”

In case your cousin can deal with all of those questions with poise and style, you would possibly significantly contemplate changing into extra concerned.

6. Lock It All Down With Paper

In my expertise, there are two sorts of individuals within the skilled world:

• Individuals who doc every little thing, and
• People who find themselves about to be taught the onerous approach

I keep in mind graduating from #2 to #1. Years in the past, a pal requested me to talk at her enterprise convention in northern Sweden. Though she couldn’t cowl my traditional charge, she’d cowl the flights, the resort, and the Köttbullar.

In complete, I took eight planes — 4 there, 4 again — and checked my bag eight instances. This amounted to a bag charge totaling $400. She declined to cowl bag charges, since she solely had the funds for flights — not luggage.

I’m the dummy who didn’t get tremendous particulars in writing. I assumed we had an “unstated settlement” to cowl all journey, when no such settlement ever existed.

I’m fortunate that my failure to doc this trade solely value $400. Within the startup world, driving on “unstated agreements” might simply value you $4 million.

Documenting every little thing — with NDAs, governing paperwork, or shareholder agreements — protects all events concerned. And should you’re not sure what must be signed, by whom, and when – seek the advice of with a small enterprise legal professional.

7. Set Skilled Boundaries

When you’re truly concerned as an investor in a pal’s startup, it may be onerous to maintain them from texting you at 2:13 am. By nature, most profitable early stage startup founders work across the clock, and should poke and prod you throughout off hours considering it’s in your individual greatest curiosity.

Subsequently, it is perhaps on you to preemptively arrange weekly or biweekly 1:1s throughout which the founder can hearth at will. When that textual content rolls in properly after workplace hours, you merely “sit up for listening to extra throughout our 1:1.”

That approach, private time between you and the founder — whether or not it’s beers, birthday events, or your daughter’s bat mitzvah — stays sacred, defending the connection from the stresses of startup life.

It might appear trivial, however boundary-setting might do extra work than some other step right here to attain the twin objective of investing in a pal’s startup: Attaining success whereas remaining associates.

8. Contemplate Non-Financial Strategies of Assist

Typically you hear your pal or cherished one pitch to you and also you suppose:

“I need to assist this individual, however I’m positively not giving them any cash.”

And that’s completely tremendous! Typically non-monetary assist is precisely what early stage founders want.

That’s very true you probably have a distinct segment talent. Maybe as an legal professional, you possibly can assist them with CYA measures. For those who’re a author, you possibly can assist them craft a extra compelling “Why” story to different traders. Or perhaps you possibly can simply play the position of a possible buyer, poking holes of their advertising, or be their hype-person at a networking occasion.

And if there’s nothing actionable you are able to do for them immediately, slightly ethical assist can go a great distance.

9. Simply Say No (Gracefully)

The phrase “no” is sort of a piece of glass; it may be a factor of magnificence, however it must be dealt with rigorously so nobody will get lower.

It may be onerous for entrepreneurs to listen to “no,” particularly in the event that they really feel entitled to your assist. I keep in mind being referred to as a “sellout” once I selected a gradual company paycheck over becoming a member of my buddy’s Spotify rival. And when one other pal and I filed a provisional patent, he bought understandably upset once I wouldn’t pony up $21,000 for the total patent.

However there are methods to say “no” that don’t step on any toes.

“Soften the ‘no’ with constructive recommendation and a suggestion to be a useful resource for them going ahead,” Kahn says. The previous George Costanza “It’s not you, it’s me” method works surprisingly properly, too.

10. What if No one Ought to Spend money on Their Thought?

So you’ve got heard the thought and — to your horror — it is an actual stinker. As in, no quantity of assist goes to get this enterprise launched.

It’s troublesome to be pitched a nasty concept from a pal. You don’t need to harm their emotions, however you don’t need to see them spin their wheels losing money and time, both.

”For my part, the worst factor you are able to do is be overly optimistic and extend their inevitable failure,” says Kahn. “That’s not what associates do.”

As a substitute, assist them uncover the identical points you see by a line of crucial questioning.

“Any founder price their salt will admire you stating their flaws to allow them to handle them… will probably be as much as you to find out in case your friendship is ready to survive sincere criticism,” says Kahn.

It is perhaps a troublesome dialog, however they’re higher off getting the sincere fact from you early than too late.

The Backside Line

A pal or member of the family asking you to spend money on their enterprise is usually a tough scenario. Whether or not you do or don’t, there are extra dangers concerned than meet the attention.

Fortunately, some cautious wording can assist you exchange their pitch right into a precious studying alternative. And saying “no” with grace is at all times an possibility.

And should you truly like listening to pitches, try our StartEngine Assessment 2022: Make investments Like You’re On Shark Tank.

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