If I could make a point with budding entrepreneurs, it would be that you should know what money you need and understand that it is at risk. Don’t bet money you can’t afford to lose. I’ll always remember a talk I had with a man who had spent 15 years trying to make his sailboat manufacturing business work, achieving not much more than aging and more debt. “If I can tell you only one thing,” he said, “it is that you should never take money from friends and family. If you do, then you can never get out. Businesses sometimes fail, and you need to be able to close it down and walk away. I wasn’t able to do that.”
The story points out why the U.S. government securities laws discourage getting business investments from people who aren’t wealthy, sophisticated investors. They don’t fully understand how much risk there is. Although you don’t want to rule out starting your company with investments from friends and family, don’t ignore some of the disadvantages. If your parents, siblings, good friends, cousins, and in-laws will invest in your business, they have paid you an enormous compliment. In that case, make sure that you understand how easily this money can be lost, and that you make them understand as well. Go into this relationship with your eyes wide open.
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