More often than not, this is the answer I get when I ask an entrepreneur if he or she has documented a recent friends and family fundraising deal. Certainly some forms of startup funding require a good deal of paperwork and spending money on legal help—selling an equity stake, for example. Because it’s quick and easy to document simple loans and some other funding options, founders should fight the urge to procrastinate on this task.
Easy and quick. You can execute a business loan using a one or two page promissory note, after negotiating a few basic terms. Once you and your friends and family (F&F) supporter agree about the general deal points, finalizing the loan with a promissory note logs the details of the loan, including items such as:
Additional clauses of a promissory note help define:
Do it yourself? Many founders opt to complete the loan paperwork without the assistance of a lawyer or CPA. There are many promissory note examples available on the Web, and with a little effort, you can save a chunk of money by preparing a draft of the promissory note yourself. Be sure to take the time to customize the wording to be specific to your business and the agreement you reach with your F&F lender. On the other hand, having a lawyer review your draft loan agreement can give you an added layer of confidence, and perhaps help you avoid common pitfalls. Use your best judgment based on your level of experience.
Our next title, Startup Crash Course: Friends and Family Funding, includes a blow-by-blow promissory note example that details all legalese and meaning of each section.