Most small companies start with money from the founders, their families and their friends. Occasionally founders may find someone outside that circle to give them money – usually known as “fools” as they often don’t really understand the opportunities or risks involved in early stage investment. Founders, Family, Friends and Fools – the “Four Fs” of seed funding.
Unfortunately, many of these relationships end with ex-founders, as the business fails. That can result in ex-friends when the business loses their money, and possibly ex-fools as they learn about early stage investment the hard way. You’re stuck with your family, but losing their money on a business venture can still make relationships pretty difficult!
Organised investment through angel groups and investors is a formal process, and there are inevitably long contracts to sign, draw up by lawyers at great expense. Many businesses starting out and taking funding from friends and family will keep things simple, and will receive money with no formal agreement in place. While spending money on lawyers in the early days can seem like a waste, that shouldn’t mean that you take money without an agreement of some sort in place. Here are some of the common areas of dispute…
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