Raising Capital

Next, you should pay close attention to a psychological imperative. When you raise money from friends and family, no matter how long and hard you describe the deal as a high-risk, equity investment, the likelihood is that they will expect you to give them their money back if things don't work out. They may not say it, and it may be the farthest thing from your mind, but that's what happens in real life.

You're going to need professional services to get your company off the ground. If you don't have cash to pay lawyers, accountants, and such, bartering may be your best option.

If your publishing venture is dependent on advertising revenue, you talk with your vendors about free advertising for their firms. If you're building a site, you talk about a prominent position on your home page, telling the world what a good job your vendors have done for you and your company. If you're a content provider, you acquire content by swapping: "Any original content that my company originates will be available to you; in turn, we can pick and choose from your content to attract visitors to our site."

But keep in mind that when you get free advice, it may be of the highest quality, or it may be worth what you're paying for it nothing. In fact, if you wind up with casual, offhand (and therefore negligent) advice, you may be worse off than when you started. We don't say this to talk you out of mooching services wherever possible. You do what you have to do in this life. We do say, however, to be cautious.

In-kind contributions (nonmonetary factors that help you run your business) are another substitute for cash. Your college roommate may be highly successful with a significant income, running, say, her own firm. Your first instinct will be to hit your old pal up for cash. That's your primary need. However, dollars to donuts she has a husband, she has kids on the way, and she is putting every spare dime she can find into a trust fund for the specter of gazillion-dollar college tuition. Despite your friendship, cash is the wrong thing to ask her for. But that doesn't mean she can't help you out.

Maybe your successful college roommate has established her business in a suite of offices with some expansion space. Ask her if you can camp out in a spare office during the early stages of your company's existence. You will agree to get out anytime that she tells you to hit the road and to pay your own phone bill. But you'll tap into her receptionist, and you'll fix the system so that someone answers the phone by giving your name and your company's name, as if you had a freestanding office. You have a mail drop, use of the fax machines (which you pay for, of course), e-mail, and all the other accoutrements of a real live office. You'll be surprised how much easier it is to mooch contributions in kind versus that scarcest of resources cash.

If you aren't prepared to give the money back, or at least do your best in the course of your lifetime to get it back to your friends and family, you may find yourself putting that most valuable commodity their friendship at risk. At the very least, if the deal doesn't work out as you planned (and the majority of them don't, we're sorry to say), be prepared to see that every available dollar goes to recoup the investments of the friends and family before you take out one personal dollar.

You'd better be ready to pay yourself no more than survival wages while your friends-and-family capital is at risk. Nothing ruins a relationship faster than a justified suspicion that your compensation was anything approaching lavish during the period you're using their capital to get going.

Raising money is serious business. You need to pay the same respect in the friends-and-family round that you would to investors in the professional round. First and foremost: put your understandings in writing. Use a placement memorandum, a disciplined approach, an elevator summary all the professional tools. Otherwise, you're simply asking them to loan you money and you're risking the very real possibility that they may misunderstand the investment they're making, or the promised returns, or both. Putting your understandings in writing not only gives your family and friends the respect they are due, but it also helps you avoid confusion and contentious debates down the road. A good lawyer also can help. This is investment capital you're talking about, after all, not a $20 loan that will be repaid next week.