Here at go NDA we understand that starting a business can oftentimes require a ton of documents and part of our mission is to make all things legal accessible. We, at go NDA, are here to help you make sense of what you need to get your start-up off the ground.
Today we are looking at raising funds through Family and Friends (F&F) and what it means to use an F&F SAFE agreement. Funding is the biggest hurdle that many founders face and typically a Friends and Family fundraising round can bring in anywhere between $10,000 to $150,000 that can help with managing the initial operation stage of a company.
Firstly, let’s look at what a Friends and Family round is.
Well, it is exactly what it says on the tin as there is no legal definition of an F&F round. An F&F fundraising round is when you utilize your network to bring in funds that go toward the running of the business. This is different from when funding is raised through an angel round.
❕ Did you know? 38% of all startups raise funds using friends & family money.
Typically, F&F investors are individuals willing to invest their finances because of their loyalty to the founders or are motivated by the founder’s startup idea.
This close personal connection makes F&F a convenient source of initial funding.
Who Counts as Friends & Family?
For example, friends and family investors could be:
- Friends or friends of friends
- People you know from school i.e (mentors, teachers, classmates)
- Past work colleagues
- Community members
Deciding who to approach for an F&F round requires you to assess what kind of funds you want to raise from friends and family. Do you want to raise equity, convertible notes, a loan, or even a gift?
Types of Friends and Family Investments
- Gift: A sum of money that does not have to be paid back to the investor.
- Loan: A loan is often the ideal method; there are set repayment terms with a loan.
- Equity Investment: An equity investment differs from any other type of friends and family investment because the investor has an ownership stake in the company, making them into a business partner rather than just an investor.
Gifts, in theory, are the simplest form of investment however, for best practice you should still produce a formal agreement acknowledging the gift.
Loans are relatively straightforward in an F&F round but similar to a gift, producing a formal agreement is always best practice.
Equity investments at the F&F stage can be slightly more complicated and it is always advised that you seek legal counsel as it is important not to dilute the number of shares available especially if you plan on seeking formal investors in future rounds. These investors will become a part of your business as shareholders if several stipulations are met.
When raising funds using an F&F round you should always be careful of mixing business with the personal and should ultimately be selective in who you ask. You should avoid asking people who
- Give unsolicited feedback that is, perhaps, not useful
- Those with who you cannot have open, honest, and constructive communication with
- Those who are unreliable
- Those who don’t understand investment risks
As F&F fundraising requires a close relationship it is common for founders to accept money without following the formalities that institutional investors require. An F&F Simple Agreement of Future Equity (SAFE) is usually required to get through the first few months, including hiring employees, renting space, or buying resources.
What Is a Friends and Family Simple Agreement for Future Equity (SAFE)?
The F&F SAFE agreement is an investment tool that has existed as an option since 2013, gaining popularity over the years. A SAFE note aims to assure the investor they will get the chance to purchase equity at a preferential price when the company issues preferred stock.
SAFEs are not debt instruments and don’t have an interest and they do not contain a maturity date, as the investors are not guaranteed equity.
There are many benefits to using SAFE agreements when asking for funds from family and friends for startups. It’s a relatively simple document that doesn’t require a great deal of negotiation. Plus, it leaves the startup in complete control.
Depending on your state, an F&F SAFE may also be known as:
- SAFE Note
- SAFE Agreement
- SAFE Bond
- Friends & Family Round
- Pre-Seed Round
Who Needs a Friends and Family Simple Agreement for Future Equity (SAFE)
Anyone with a great business idea but insufficient funding can use an F&F SAFE, as SAFEs don’t require an initial valuation.
What Information Is Needed to Create An F&F SAFE?
- Company’s Name: The full name of the company, address, and contact information
- Investor’s Information: The full legal name of the family member and their contact details
- Terms of the Agreement: All provisions of the agreement, including any valuation caps and discounts
- Investment Amount: The sum of money the investor is providing
- Specified Triggering Event: An event that will prompt either purchase of the shares or an exit strategy
- Signatures: Both parties are required to sign the agreement
- Convertible Note: A type of bond that you can convert into a specific number of shares
- Valuation Cap: Also known as conversion cap, represents a price ceiling for purchasing shares
- Maturity Date: A particular moment after which the company has to repay their investors
What to Do With Your Friends and Family Simple Agreement for Future Equity (SAFE)
After the F&F SAFE is signed, the investor releases the funds to the company per the terms of the agreement. The recipient of the funds must utilize them in the way it was stipulated in the contract. Both parties should have a copy of the agreement for archival purposes.
Tips for a successful F&F round
- Hone in on the Right People
Finding the right investors can add value in larger rounds and you should determine if these friends and family investors have a professional background or understand the risks and benefits associated with financing your idea.
- Ease Them In
Once you have an idea of who to ask, ease them in. Investing is as much about relationship building as it is selling your startup idea. Showing you can communicate clearly and demonstrate early on can help potential investors see more value in you as a founder.
- Make the Pitch
When the time is right, make the pitch.
- Seal the Deal
This is self-explanatory, if all the above has gone successfully now is the time to make it official.
- Document Financials
Document everything, by having your financials and agreements in check, future investments will be significantly smoother.
- Keep Them Updated
Remember, one of the key elements of an F&F round is that these are people you already have a strong relationship with and building open and ongoing communication with your investors is always beneficial.
Why Use go NDA for Your Friends and Family Simple Agreement for Future Equity (SAFE)
- Customized for you, by you
Create your documents in real-time with our mobile app
- Specific to Your Jurisdiction
Laws can often vary by state. Each document in our go NDA mobile app is customized for your state.
- Easy and Efficient
All documents within our template library are customisable in real-time and can even be signed and notarized when needed, all within the app.
Download the go NDA app to access customisable templates and curated sets of documents that you need today!