Congratulations! Your idea is taking off! You’ve been bootstrapping your company, working into all hours of the night. But now, it’s time to take it to the next level. The only problem? The next level is expensive.

In the world of entrepreneurship, securing funding can often feel like navigating a labyrinth. From venture capitalists to angel investors, there are various avenues to explore. However, one often overlooked yet immensely powerful resource for budding entrepreneurs is friends and family fundraising.

The Essence of Friends and Family Fundraising.

Friends and family fundraising, as the name suggests, involves raising capital from your existing, immediate social circle, including friends, family members, and close acquaintances. It's a time-honored tradition in the entrepreneurial world and can be a crucial stepping stone for many startups.

Accreditation..

Generally, the Securities Act of 1933 requires any sale of securities to be registered with the Securities and Exchange Commission (SEC). Additionally, investors are typically required to be accredited. Meaning the investor meets specific criteria related to income, net worth, or professional experience, as defined by the SEC. This accreditation allows investors access to investment opportunities that may not be available to the general public due to their complexity or risk level. However, there are a few exemptions from registration and accreditation.  

506

Rule 506 allows a startup to collect investment from up to 35 non-accredited investors in its initial round of fundraising. There is a requirement that your non-accredited investors have “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”  This essentially forbids founders from taking advantage of inexperienced investors.

504

Rule 504 allows this first round of investment to raise up to $1 million over 12-months. The caveat here is that all investors must be a pre-existing connection - meaning you must know and have a relationship with them before soliciting the investment. Additionally, you cannot broadcast that you are seeking investment.

Success Stories.

Countless successful companies have started with funding from friends and family. For example, Jeff Bezos initially raised $300,000 from his parents to get Amazon off the ground. Later, he asked for just $10,000 from each of his siblings. His siblings are now both worth over $1 billion! Similarly, Steve Jobs received financial support from his family to launch Apple in the famous garage in Silicon Valley. It may be hard to ask for money from your friends and family, it may make Thanksgiving even more awkward, but all the greats have done it and you can too! If you believe in your idea, so will those closest to you.

Final Thoughts.

There you have it! The foundation you need to begin scaling your company and taking it to the next level. Friends and family fundraising is not just about raising capital; it's about leveraging the power of your personal network to turn your entrepreneurial dreams into reality. While it comes with its own set of challenges and considerations, it can be an invaluable resource for early-stage startups.

So, if you're considering embarking on the entrepreneurial journey, don't underestimate the potential of friends and family fundraising. With the right approach, it could be the catalyst that propels your venture to success. By tapping into your existing network, you can raise your first round and avoid some of the time-consuming regulations of working with accredited investors.

But don’t forget - asking for money from friends and family can be more than just awkward. It can raise its own set of unique issues such as equity, transparency, and autonomy. These issues and more will be discussed in a later article - check back soon!

Case-by-Case Review.

A startup fundraising strategy vary on a case-by-case basis and should be thoroughly analyzed before moving forward.

Zecca Ross Law Firm P.C. regularly assists founders in making well-informed decisions on these matters. If you have any questions regarding the content of this article, please contact Zecca Ross Law Firm P.C. at contact@zeccaross.com and schedule a free 15-minute consultation. Zecca Ross Law Firm P.C. delves into the legal, financial, and operational challenges that venture-backed startups and their founder’s encounter. Topics include entity formation, issuance of founder equity, fundraising from investors, and securities laws.

‍