Friends and family investment rounds: A founder's guide

Everyone starts somewhere. And for many startups, that first injection of capital comes from people who already believe in you – your friends and family.

However, blending personal relationships with business can be tricky. While early investments can help your startup build momentum, they still need to be managed thoughtfully. 

Like any other investment, raising funds from family and friends requires a clear plan to protect both your relationships and your business. And establishing best practices now will pay dividends in the future (literally, hopefully). 

So, read on to learn about family and friends investment rounds and how to get them right.

Understanding friends and family rounds

A friends and family round is a pre-seed funding round used to build initial traction before approaching professional investors.

By this point, you’ll have invested your own money in your business (which means creating a limited company in most instances), created a business plan, and already be actively committing your time to grow the business.

It goes without saying, really, that you can’t go asking family and friends for cash without your own commitment being tangible and obvious.

The timing of these rounds is also key. Many founders approach friends and family too early, before they've validated basic assumptions about their business.

Others wait too long, missing the opportunity to use this capital for critical early development.

Getting the numbers right

Friends and family rounds typically range from £10,000 to £250,000, enough to achieve meaningful progress without asking too much or giving away too much of your company.

This initial funding should provide a sufficient runway to push your business towards raising seed funding. Many startups use it to build a minimum viable product, secure early customers, or prove market demand – all vital for pitching to angel investors and VCs. 

Setting the valuation

Before you can decide how much equity to offer in exchange for capital, you’ll need to realistically estimate your company's value.

At the pre-revenue stage, this is far from an exact science. Take into account the following:

1. What you've put in

Your own investment matters enormously. This includes actual cash invested, but also assets transferred to the business and any personal guarantees or loans you've taken on.

Don't underestimate the value of the time you've invested, particularly if you've taken a reduced salary or worked for free to get the business going.

2. What you've built

Early-stage valuations heavily depend on what you've actually created. A working prototype is worth more than a concept.

Patents or proprietary technology add significant value. Early customer pilots or letters of intent show market validation. Even informal partnerships with key players in your industry can boost your valuation.

3. Your potential

Your team's track record in the industry, any unique technological or market advantages, and clear barriers to competition all factor in.

Perhaps most importantly, you need a credible plan for how you'll use the money to grow. This is an investment round, after all, not a loan!

Setting the terms

Many startups end up giving away between 5% and 20% in their friends and family round, depending on their valuation and how much they're raising.

But be careful – whatever valuation you set now will affect future funding rounds. Price too high, and you might struggle to raise more later. Price too low, and you risk giving away too much too soon.

Keep in mind also that professional investors participating in future rounds may evaluate how you handled these early investments. They'll ideally want clean, simple share structures – not a messy cap table with lots of small shareholders holding different rights. 

What's in it for early investors?

Early investors become genuine shareholders in your company, with the same rights as other shareholders of their class. While early-stage investment is high-risk, the potential rewards include:

• Exit events: If the company is sold or goes public, shareholders receive their portion of the proceeds.
• Share buybacks: The company might buy back shares if it has the funds.
• Secondary market sales (though this depends on finding willing buyers and any transfer restrictions).
• Dividend payments (though these are rare in early-stage companies focused on growth).

Just remember, while the potential upside can be massive, early-stage investments are inherently risky. Make sure both you and your potential investors are ready for the journey ahead.

Protecting relationships and business

Mixing personal relationships with business can be tricky territory. We've heard a few founder horror stories in our time!

Start by being brutally honest about what could happen to their investment. Most startups fail, and even successful ones can take years to deliver returns.

Create a clear document outlining different scenarios, from total loss to modest success to exceptional outcomes. This will help potential investors understand exactly what they're getting into.

The legal frameworks

Even with family and close friends, a proper shareholder agreement isn't optional. It should include everything from voting rights to exit arrangements, clearly defining:

• Who makes what decisions, and how
• Rules for selling or transferring shares
• What happens if someone wants to exit early
• How future funding rounds will work
• Rights during a company sale

Our co-founder prenups take these precautions one step further so founders can enjoy total peace of mind when it comes to company ownership.

Clear documentation and well-thought-out agreements show you're serious about building a proper business, not just borrowing cash from your family members and mates!

Broaching the conversation

Approaching friends and family about investment often feels awkward, but it needn't be.

The key is treating it as professionally as you would any other investment conversation, within reason, of course (you might pitch your ideas in the living room rather than a boardroom, after all).

Nevertheless, present your business case clearly. Even though these investors know you personally, they need to understand what they're investing in.

Walk them through your market opportunity, explain how you'll use the money, and share your vision for growth.

Be prepared to discuss:

• Equity!
• How you'll use the investment
• Your business model and revenue plans
• Market size and competition
• Your team and their experience
• Exit plans and timelines

Of course, it goes without saying that if someone says no, accept it gracefully. There will be other funding opportunities.

Tips to make it work long-term

Receiving investment is amazing - but your responsibilities certainly don’t end there.

Regular updates keep investors engaged and informed. Monthly updates covering progress, challenges, and plans help maintain transparency and trust.

When challenges arise, communicate early and openly. Nothing damages relationships more than surprises or feeling left in the dark. Be particularly careful about sharing news that might affect the value of their investment.

Are family and friends eligible for SEIS or EIS?

While the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) offer up to 50% income tax relief and potential CGT exemption, HMRC has strict rules about who can invest.

Who can invest under SEIS/EIS?

The great news is that many friends and family members can take advantage of these schemes.

Siblings, aunts, uncles, cousins and friends are all potentially eligible investors. However, HMRC has clear restrictions around "connected persons".

You can't receive SEIS/EIS tax relief if you're connected to someone with a substantial interest in the company (defined as holding more than 30% of shares or voting rights).

This rules out:

• Spouses and civil partners
• Parents and grandparents
• Children and grandchildren

If you're eligible for SEIS/EIS, the first step is applying for SEIS/EIS Advance Assurance, which provides certainty that your investors can claim tax relief.

Vestd makes applying for Advanced Assurance simple. We’ll walk you through the process step by step, check everything over, and submit the application to HMRC on your behalf.

Take it seriously

A high level of professionalism and transparency matters, even with friends and family investors. As does effective shareholder management.

Instead of managing multiple documents and trying to keep track of everything manually, Vestd is a central platform where:

• All shareholdings are digitally recorded and tracked
• Legal documents are automatically generated and stored
• Companies House filings are handled seamlessly
• Cap tables update automatically as things change
• You can add current valuations and update shareholders
• Future funding rounds can be modelled and planned

It shows that you're treating their investment seriously and gives them confidence that everything is being managed properly. In fact, this is a great opportunity to lay those foundations. You’ll thank yourself later on.

Ready to set up your friends and family round? Book a call with Vestd to see how we can help you professionally manage shares, funding rounds and investor comms from day one.