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Contrary to popular belief, business startups are almost never financed by venture capitalists. It is only a very tiny minority who get such funding, and then they are probably either hi-tech or likely to grow to a value of tens of millions of dollars or more in 3-5 years—or both. The vast majority of entrepreneurs starts their business with their savings and help from their family and friends. Unwise ones use their credit cards and rack up high interest costs.
This book is about the process of raising loans and equity capital from the people you know. Actually it is mostly about the former. Sadly many people, both borrowers and lenders do not take an organized approach to the transaction and risk ending up in all kinds of disputes and relationship breakdowns. The author of the book, Asheesh Advani takes the reader through the process step by step—from fundraising to signing the check. Even though you may be borrowing from a close relative, or particularly when you are doing so, you are well advised to document the deal.
At the very least, Advani points out, the parties should sign a promissory note that records the amount, conditions and repayment schedule for the loan. But before you get that far, it is important to decide what business structure you want to adopt, given the special circumstances of your enterprise. Then you need to be clear about the differences between a gift, a loan and equity, because very often one of the parties may be thinking that the money they provided was one of these and the borrower may have assumed something different.
When you seek business finance from a source other than an institution, you may not necessarily produce a full-blown business plan, but it would be a grave mistake not to have a plan of some sort and to be able to make a presentation of it, whether it is what Advani calls a "Kitchen Table Pitch" or something more elaborate. Even Aunt Ada should have an understanding of what your business is about and where it is going.
If it was a gift, then there are some serious tax implications; if it was a loan, then there are repayments; if equity is involved, then part of the business will be changing hands. In any of the three cases and however close you are to the family member or friend, it is as well for the mutual expectations to be crystal clear. "Investors in Your Backyard" is a practical book that deals with a very cloudy, but frequent business transaction. It is amazing that it has only just been published.
Legal or accountancy advice is often recommended for loan and equity deals with family and friends, but it is by no means necessary, especially where the deals are straightforward. The advantage of this book is that it has basic forms for all the necessary paperwork, both in printed and CD-ROM format. Given that Advani is the founder of circlelending.com, he really knows what he is talking about. His company can play the role of independent manager of loans between relatives, friends and business associates, if you prefer to increase the arms-length nature of a deal.
I am in the business of providing such loans within my community and I believe that "Investors in Your Backyard" is required reading for anyone seeking a loan of this type, anywhere. Even for those who are just thinking about setting up in business, rather than necessarily taking the leap, this book will be of enormous help in structuring their thinking about entrepreneurial finance. At $24.99, WorkSavvy rates this as probably the wisest investment they can make.
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William Keyser, February 21, 2007
Contrary to popular belief, business startups are almost never financed by venture capitalists. It is only a very tiny minority who get such funding, and then they are probably either hi-tech or likely to grow to a value of tens of millions of dollars or more in 3-5 years—or both. The vast majority of entrepreneurs starts their business with their savings and help from their family and friends. Unwise ones use their credit cards and rack up high interest costs.This book is about the process of raising loans and equity capital from the people you know. Actually it is mostly about the former. Sadly many people, both borrowers and lenders do not take an organized approach to the transaction and risk ending up in all kinds of disputes and relationship breakdowns. The author of the book, Asheesh Advani takes the reader through the process step by step—from fundraising to signing the check. Even though you may be borrowing from a close relative, or particularly when you are doing so, you are well advised to document the deal.
At the very least, Advani points out, the parties should sign a promissory note that records the amount, conditions and repayment schedule for the loan. But before you get that far, it is important to decide what business structure you want to adopt, given the special circumstances of your enterprise. Then you need to be clear about the differences between a gift, a loan and equity, because very often one of the parties may be thinking that the money they provided was one of these and the borrower may have assumed something different.
When you seek business finance from a source other than an institution, you may not necessarily produce a full-blown business plan, but it would be a grave mistake not to have a plan of some sort and to be able to make a presentation of it, whether it is what Advani calls a "Kitchen Table Pitch" or something more elaborate. Even Aunt Ada should have an understanding of what your business is about and where it is going.
If it was a gift, then there are some serious tax implications; if it was a loan, then there are repayments; if equity is involved, then part of the business will be changing hands. In any of the three cases and however close you are to the family member or friend, it is as well for the mutual expectations to be crystal clear. "Investors in Your Backyard" is a practical book that deals with a very cloudy, but frequent business transaction. It is amazing that it has only just been published.
Legal or accountancy advice is often recommended for loan and equity deals with family and friends, but it is by no means necessary, especially where the deals are straightforward. The advantage of this book is that it has basic forms for all the necessary paperwork, both in printed and CD-ROM format. Given that Advani is the founder of circlelending.com, he really knows what he is talking about. His company can play the role of independent manager of loans between relatives, friends and business associates, if you prefer to increase the arms-length nature of a deal.
I am in the business of providing such loans within my community and I believe that "Investors in Your Backyard" is required reading for anyone seeking a loan of this type, anywhere. Even for those who are just thinking about setting up in business, rather than necessarily taking the leap, this book will be of enormous help in structuring their thinking about entrepreneurial finance. At $24.99, WorkSavvy rates this as probably the wisest investment they can make.
Terms and Conditions
We welcome your comments and ideas, but we ask that you refrain from:- Obscenity
- Spam
- Illegal content
- Copyrighted material
- Commercial solicitations
By posting your comments you are granting the good people of Powells.com the right (but not the obligation) to make your comments available to others over the Internet, and to copy and distribute your comments via other media, in each case on a royalty free basis. These terms govern the rights and obligations of the person posting comments and Powells.com; there are no intended third party beneficiaries of these terms. Posted comments are subject to monitoring, editing, and removal at any time. Please see our Terms of Use for our complete terms and conditions.Children's Online Privacy Protection Act
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