Inner circle can provide equity and emotional support

By Carollyn Chaplin

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Photo / Thinkstock
Photo / Thinkstock

Is it usual for start-ups to get help from family and friends?

Family and friends will become your biggest supporters and your biggest critics and in some cases your first investors.

At The Icehouse, we encourage our entrepreneurs to use their "start-up" position and leverage what they can from personal networks. Often start-ups are cash-strapped and are forgoing their primary income during the set-up phase so family and friends can be the first point of call. The majority of funding for early start-ups comes from family and friends.

What kinds of help can family give?

It can be funding in return for equity in the business, but that's not the only way. It can be in the shape of emotional support - a start-up journey can be tough. It is full of highs and lows. Friends and family need to be there to celebrate successes but also to pick up the pieces when the days are tough.

Family can help add the reality factor. There is nothing quite like hearing it "straight up" from a sibling.

They might help by connecting you up with your first customer.

An experienced family member or friend who has been down your path before might provide insight.

They could have lessons learned from a failed business. Ask what went wrong, what were they proud of, what would they never do again?

They can make introductions to important players in your space and they can connect you into their networks.

Where would you advise caution?

Be aware the advice and opinions of family and friends can be biased - they may tell you what you want to hear.

So when considering an idea it is important to get unbiased and objective guidance. Ideas should be challenged and explored with people who have no vested interest in the business or applicable sector or market experience, which often rules out family and friends.

What about family members being shareholders in a venture?

Start-ups should tread carefully in terms structuring business ownership. They should get professional advice and have all agreements formalised.

Given family and friends are usually the first investors, it is likely that at some stage the business needs to raise more capital and their shares will be diluted or more investment will need to be made to maintain original shareholdings. A shareholding agreement will provide a framework for future share allocations.

How else can small businesses repay families for their support in the early days?

Sharing in the success is all friends and family may expect. Celebrating milestones and having a communications plan to avoid surprises are good ideas for start-ups.

Carollyn Chaplin is executive in residence at The Icehouse.

- NZ Herald

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