What To Do When a Friend Asks for an Investment in Their Business

During my brief tenure at the Nashville Entrepreneur Center, I began hearing a new question from friends and family:

Can I tell you about my business idea?

To their credit, sometimes these folks were further along:

We’re bringing in early stage capital and I thought you’d like to hear about it.

I’ve come to learn that this question is loaded like a Wendy’s baked potato — and equally dense with unseen dangers.

If you’ve been asked this question, how do you take off the friendship-goggles and see the opportunity clearly? What kinds of questions should you ask before saying “yes”? And how do you say “no” without making things awkward?

Let’s cover what to say and do when a friend asks for an investment in their business, Choose Your Own Adventure-style!

1. Ask for the Elevator Pitch

If a friend or family member has an exciting new venture, they may act a bit overzealous in their initial approach. They might want to tell you the whole story behind the idea, how the potential is sky high, and how they’ve already begun talks with VCs.

This is your opportunity to set your first boundary and keep things professional.

By simply saying “Hey, that sounds interesting, let’s hear the elevator pitch,” you’re subtly nudging them to treat you like any other professional investor.

2. Request All the Necessary Documents

If you hear the elevator pitch and think “Gee, they may be onto something here,” your next step is to ask for the paperwork so you can conduct your own due diligence on the business.

This includes:

3. Evaluate the Offer As Objectively as Possible

When it comes to assessing a startup investing opportunity, it shouldn’t matter if the founder is a total stranger or your best friend for 20 years.

When you’ve been approached with an investment opportunity, even from a good friend or even a blood relative, it’s important to view the founder and business completely objectively. After all, that’s how customers and other investors will see them, too.

Because when it comes to business, leadership is everything.

“A great idea with bad leadership is doomed. A mediocre idea with good leadership has a decent shot.” says Adam Kahn, Principal at Unorthodox Ventures.

With that in mind, hear them out and proceed with caution.

4. Consider Whether the Opportunity Is a Fit for Your Own Goals

A less experienced investor might ask:

“Is this a good investing opportunity?”

A more experienced investor will ask:

“Is this a good investing opportunity for me and my goals?”

Maybe your buddy has a sincerely good investing opportunity, but the liquidity lockup period is just too long. You’d rather have that cash free to buy the bear market.

“Whatever the reason, the chances that your friend’s company is going to be a good fit for your investment strategy are slim to none,” says Kahn.

5. Ask the Tough Questions

If you’ve made it this far, it’s time to play Shark Tank. 

This is your chance to start grilling your friend. This may cause some short term tension if they choose to interpret your interrogation as a lack of faith — but a true entrepreneur will see it as a sign of interest.

Take note of what they say and how they say it. If it sounds like they’ve answered these questions before, that’s a good sign.

“I like to ask ‘how’ questions,” says Kahn. “Pick a critical piece of the business strategy and drill down as deep as possible. You do this to see how much of their strategy is just a pretty infographic on a well-tuned pitch deck.”

If your cousin can handle all of these questions with poise and grace, you might seriously consider becoming more involved.

6. Lock It All Down With Paper

In my experience, there are two types of people in the professional world:

• People who document everything, and
• People who are about to learn the hard way

I remember graduating from #2 to #1. Years ago, a friend asked me to speak at her business conference in northern Sweden. Although she couldn’t cover my usual fee, she’d cover the flights, the hotel, and the Köttbullar.

In total, I took eight planes — four there, four back — and checked my bag eight times. This amounted to a bag fee totaling $400. She declined to cover bag fees, since she only had the budget for flights — not bags.

I’m the dummy who didn’t get fine details in writing. I assumed we had an “unspoken agreement” to cover all travel, when no such agreement ever existed.

I’m lucky that my failure to document this exchange only cost $400. In the startup world, riding on “unspoken agreements” could easily cost you $4 million.

Documenting everything — with NDAs, governing documents, or shareholder agreements — protects all parties involved. And if you’re unsure what needs to be signed, by whom, and when – consult with a small business attorney.

7. Set Professional Boundaries

Once you’re actually involved as an investor in a friend’s startup, it can be hard to keep them from texting you at 2:13 am. By nature, most successful early stage startup founders work around the clock, and may poke and prod you during off hours thinking it’s in your own best interest.

Therefore, it might be on you to preemptively set up weekly or biweekly 1:1s during which the founder can fire at will. When that text rolls in well after office hours, you simply “look forward to hearing more during our 1:1.”

That way, personal time between you and the founder — whether it’s beers, birthday parties, or your daughter’s bat mitzvah — remains sacred, protecting the relationship from the stresses of startup life.

It may seem trivial, but boundary-setting may do more work than any other step here to achieve the dual goal of investing in a friend’s startup: Achieving success while remaining friends.

8. Consider Non-Monetary Methods of Support

Sometimes you hear your friend or loved one pitch to you and you think:

“I want to help this person, but I’m definitely not giving them any money.”

And that’s perfectly fine! Sometimes non-monetary support is exactly what early stage founders need.

That’s especially true if you have a niche skill. Perhaps as an attorney, you can help them with CYA measures. If you’re a writer, you can help them craft a more compelling “Why” story to other investors. Or maybe you can just play the role of a potential customer, poking holes in their marketing, or be their hype-person at a networking event.

And if there’s nothing actionable you can do for them right away, a little moral support can go a long way.

9. Just Say No (Gracefully)

The word “no” is like a piece of glass; it can be a thing of beauty, but it needs to be handled carefully so no one gets cut.

It can be hard for entrepreneurs to hear “no,” especially if they feel entitled to your support. I remember being called a “sellout” when I chose a steady corporate paycheck over joining my buddy’s Spotify rival. And when another friend and I filed a provisional patent, he got understandably upset when I wouldn’t pony up $21,000 for the full patent.

But there are ways to say “no” that don’t step on any toes.

“Soften the ‘no’ with constructive advice and an offer to be a resource for them going forward,” Kahn says. The old George Costanza “It’s not you, it’s me” approach works surprisingly well, too.

10. What if Nobody Should Invest in Their Idea?

So you’ve heard the idea and — to your horror — it’s a real stinker. As in, no amount of support is going to get this business launched.

It’s difficult to be pitched a bad idea from a friend. You don’t want to hurt their feelings, but you don’t want to see them spin their wheels wasting time and money, either.

”In my opinion, the worst thing you can do is be overly positive and prolong their inevitable failure,” says Kahn. “That’s not what friends do.”

Instead, help them discover the same issues you see through a line of critical questioning.

“Any founder worth their salt will appreciate you pointing out their flaws so they can address them… it will be up to you to determine if your friendship is able to survive honest criticism,” says Kahn.

It might be a tough conversation, but they’re better off getting the honest truth from you early than too late.

The Bottom Line

A friend or family member asking you to invest in their business can be a tricky situation. Whether you do or don’t, there are more risks involved than meet the eye.

Thankfully, some careful wording can help you convert their pitch into a valuable learning opportunity. And saying “no” with grace is always an option.

And if you actually like hearing pitches, check out our StartEngine Review 2022: Invest Like You’re On Shark Tank.

If you’re looking for a safer investment, we’ve got those too >>>