How to structure a Friends and Family Fundraising Round?

Structuring a Friends and Family Fundraising Round involves creating a clear framework for raising initial capital from close personal connections while maintaining professionalism and protecting relationships. Below is a step-by-step guide:

1. Define Your Goals

• How Much to Raise: Determine the total amount needed to reach your next milestone (e.g., MVP completion, initial market validation).

• Example: $50,000–$200,000 depending on your requirements.

• What the Money Will Be Used For: Clearly outline the use of funds (e.g., product development, hiring, marketing).

2. Decide on the Investment Structure

Choose one of the following structures based on your goals and long-term plans:

a. Convertible Note

• A loan that converts into equity during a future funding round at a discounted rate.

• Key Features:

• Discount rate (e.g., 15–20%).

• Interest rate (optional, typically 2–8% annually).

• Valuation cap (the maximum valuation at which the note converts).

• Why Use It: Delays setting a valuation, making it easier to raise future rounds.

b. SAFE (Simple Agreement for Future Equity)

• A simpler version of a convertible note with no interest or maturity date.

• Key Features:

• Discount rate and/or valuation cap.

• Why Use It: Streamlined and founder-friendly.

c. Equity Round

• Sell equity directly to investors based on a pre-money valuation.

• Key Features:

• Pre-money valuation (e.g., $1M).

• Ownership percentage given in exchange for funds.

• Why Use It: Appropriate if you have a clear idea of your valuation.

3. Set Terms

• Be Transparent:

• Use plain language to explain terms to your friends and family.

• Provide documentation outlining investment structure and risks.

• Standardize Terms:

• Offer the same terms to all participants to avoid confusion or resentment.

4. Create Legal Documentation

Work with a lawyer to draft the following:

• Convertible Note or SAFE agreements.

• Term sheets if raising an equity round.

• Disclosures about the risks involved (you may need a Private Placement Memorandum for legal compliance).

5. Communication and Pitching

• Prepare a Pitch Deck:

• Include problem, solution, market size, business model, team, and funding needs.

• Be Honest About Risks:

• Friends and family may not fully understand startup risks, so make it clear they could lose their investment.

• Respect Relationships:

• Don’t pressure anyone to invest, and maintain transparency about updates and progress.

6. Manage Funds Professionally

• Set Up a Dedicated Bank Account: Ensure funds are kept separate from personal finances.

• Track Investments:

• Use a tool like Carta or CapTable.io to manage equity or note holders.

7. Set Post-Investment Expectations

• Regular Updates:

• Commit to providing quarterly updates, even if informal.

• Clarity on Exits:

• Explain when and how they might see a return on investment (e.g., acquisition, future funding).

Example Structure

Let’s say you’re raising $100,000 using a SAFE:

1. Valuation Cap: $2,000,000.

2. Discount Rate: 20%.

3. Funds Raised: $100,000 from 10 investors, each contributing $10,000.

4. Ownership: Investors will collectively own 5% of the company if the SAFE converts at the cap.

Tips for Success

1. Keep it Small: Avoid involving too many people to reduce complexity.

2. Legal Compliance: Ensure you comply with securities regulations in your country.

3. Be Prepared for Future Rounds: Structure terms that won’t scare away professional investors later.