Earlier this week Billboard Insider talked about funding your out of home company with your own funds. Today we talk about funding your out of home company with money from friends and family. One-fourth of Billboard Insider’s readers have used equity from friends and family to fund their OOH company. Huntington Outdoor and Meadow Outdoor are two examples which come to mind. Here are some of the pros and cons.
Pros
Friends and family know you which eliminates much of the due diligence that accredited investors or an equity fund will require before they invest with you.
Friends and family may know the out of home business, which makes it easier to explain what you’re doing and why it makes sense. We are aware of several parents who have launched their kids in the out of home business.
Documentation requirements are typically less.
Cons
Things can get awkward if the investment doesn’t live up to expectations. Your friendship or family relationships may be strained, or it will simply be awkward to be around someone and constantly be reminded that things haven’t gone the way you promised. Mike Zukin of Meadow Outdoor gives this advice: “If you want to keep your friends and family and have them participate in funding your business, then put them first and yourself last.”
Family dynamics can complicate a business relationship. If you aren’t getting along with a family member, those disputes may carryover into the out of home advertising business. It can also make it difficult to make a rational business decision. What if you take money from a family member and employ them and they don’t work out as an employee?
Friends and family may have lower investment thresholds than accredited investors or an equity fund. Family members may be reluctant to invest more than $100,000 with you while accredited investors are often comfortable investing up to $250,000 and an equity fund can invest millions.
Friends and family may be considered non-accredited investors and raising money from non-accredited investors for a startus may violate your state’s securities laws. Your mother or best friend might be smart but they may not meet the definition of a sophisticated investor. We’ll talk about accredited investors in our next article.
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Apropos of out last comments on Monday’s article, “clarity above all else!”
If you are investing, are you mentally prepared to lose your investment without the loss affecting your relationship? If you are receiving the investment, will you want to avoid the investors if things aren’t going as well as you hoped? Will you resent their dividends or profit share? After all, it will be your sweat and years that will build the business. It’s all to easy to forget the role that their investment played.
Despite all that, a friends and family-built business can be the best of all worlds. Before committing to that, make sure that everyone knows exactly who will be the parties, shares the same understanding of the facts, agrees everyone’s goals are compatible, and knows who will do what.