#FriendsAndFamilyRound #Investing #Startups #Technology #Entrepreneurship
Have you ever heard of a friends and family round of investing 🤔? Let me break it down for you like you’re 5 years old! So, imagine your friend or family member comes up with a super cool idea 💡to invent something new and amazing. They need money 💰to turn their idea into reality, and that’s where you come in as an investor 🚀.
### What is a Friends and Family Round?
In the world of startups and entrepreneurship, a friends and family round is the first stage of fundraising where the entrepreneur reaches out to their close network of friends and family members to invest in their business idea. This is often done at the very early stages of a company’s development when traditional investors may not be willing to take a risk 🎲.
### How Does It Work?
In this scenario, let’s say your colleague and friend has a groundbreaking technology that could revolutionize a market worth billions of dollars 💸. He is inviting you to invest in his company at a pre-money valuation of $5 million, with shares priced at $0.87 each. This means that for every $0.87 you invest, you get a piece of the company 🔄.
### Understanding Dilution
Now, here’s where it can get a little tricky. As the company grows and seeks more funding in future rounds, such as Series A, B, or C, they may issue more shares to new investors. This can dilute your stake in the company, meaning your percentage ownership may decrease over time ⬇️.
### Your Options
But don’t worry, you’re not obligated to sell your shares in upcoming rounds if you don’t want to. If the company continues to do well and increase in value, your shares could also become more valuable 💰. However, if you choose to participate in later funding rounds, you may need to invest more money to maintain your ownership percentage.
### Impact on Stock Value
As more funding rounds take place and more shares are issued, the stock value can fluctuate based on various factors such as the company’s performance, market trends, and investor sentiment. It’s important to stay informed and monitor the company’s progress to make informed decisions about your investment.
In conclusion, participating in a friends and family round can be an exciting opportunity to support someone you believe in and potentially benefit from their success in the long run. Just remember to do your homework, understand the risks involved, and consult with financial advisors if needed. Investing in startups can be a rollercoaster ride, but it can also be a rewarding experience if done wisely 🎢.
5m valuation pre seed round… ambitious.
Hello funding venture startup consultant here. It depends on the stipulated agreement and/or arrangement put in place. I can explain more reach out.
Typically future rounds will dilute you (more shares will be issued, you will keep your shares). You usually won’t have an opportunity to sell the shares until the company is somewhat mature. If things are going well, the value of your shares will increase as your % ownership of the company decreases.
At the Series A, for example, the company might dilute 25% for $10M. You as a shareholder are happy because the company has $10M in the bank to help them grow the company by a lot more than 25% (assuming things go as planned).
How was the 5mil figure arrived-at, does it already have good traction ARR?
To use a strained metaphor, imagine dividing a pie into 10 pieces. You own 1 of those pieces (10% of the company).
Now, let’s say a funding round happens. They will CREATE 2 more pieces of pie, so there are now 12 pieces of pie. You now own 8.3% of the total. This is known as dilution.
Also just a word of advice, don’t invest anything that you’re not willing to lose — even the best of the best startups are risky, and the money will be locked up for a long time.
I’d be very careful pricing your own company is a pre-seed stage. Idk what the product is but you’re leaving yourself open to a down round which will be bad long term.
friends and family
First of all, doing a priced round at this stage is very uncommon, mostly because there’s nothing to “price” yet. Normally, most of the funding before Series A is done through convertible/safe notes. At Series A, companies already have revenue and more or less predictable sales.
To answer your questions:
* yes, your shares will be diluted, but chances are they will be diluted not just because of new investors, but because your friend has the power to issue more shares.
* you don’t have to sell the shares in the future rounds
Hey OP. You do you, but some of what you outlined doesn’t smell right. Why are they issuing shares? It really should be in a safe. Also..have you seen market validation that their product is in a 400m-1B market? What’s their total serviceable obtainable market? Sounds like your not experienced investor (that’s ok) but also sounds like they might not be experienced in startups. I’d chat with a lawyer before handing over money.
Your friend should be raising on SAFE investments first
“Do they dilute my stake in the company?” – Yes. Typically you have a pro-rata and can purchase more shares in the future to not be dilued. But with each new round, “new” stock is being created and sold.
“Am I obligated to sell a portion at an agreed price in upcoming series?” – No. You typically have to hold your shares until a liquidity event (Sale/IPO). Your money is basically locked in there.
“How does this all affect stock value?” – In a normal scenario… stock price goes up from round to round, while your share of the company goes down. The stock price is normally going up faster than your share of the company is going down.
Hey, one way to go about it is to seek an acquisition by small scale PE or go through to a venture exchange, they truly are designed to keep the wheels of innovation fueled on things like this.
It does matter if you have IP, which is allegedly disruptive, if you have no partners who are capable of delivering reaction. If the product isn’t on shelves or in servers, then look at this.
IP can be purchased now or in 10 years, or never. There’s absolutely zero difference.
The company should not issue shares now. A company at this stage would usually do a SAFE – let me explain SAFE in regards to FNF (Angel) investors.
The company now has only the idea, the tech, and maybe a few or potential few customers. The founders do not know what the value of the company is, neither do the investors. Hiring lawyers, financial advisers, and other professionals to do these things at this stage is a stupid idea because nobody actually can calculate the real value of the company.
So they would do a SAFE – Simple Agreement for Future Equity – as the name suggests, this basically is an agreement that say Mr. X is giving the company 50K because he thinks these guys have a good idea and these are the right people to execute this idea. Since we do not know the value of the company let’s keep it for the future – Mr. X will get what a future investor would get – we are just delaying the negotiation.
The founders take money from Mr. X, build their product and get a certain amount of traction that increases the value. They now go to a VC fund and raise a bigger amount at a 10M valuation – since they have tangible transactions now to decide a valuation. Mr. X now will get equal ownership as per the ratio of what this VC fund will get.
Wait, but Mr. X invested when the company was just an idea and the VC fund is investing when the company has tangible values. Mr. X took higher risks- what’s the reward? Well during that SAFE, the company and Mr. X will come to an agreement that he will be rewarded for his risks. This is what we call a cap in the valuation or a discount or both. The cap is more popular. Which says since you are taking early risks- we will reward you with a valuation cap 5M – which is no matter what the valuation the VC firms invests at – your shares will be issued at a 5M valuation.
Risks for you? The company may die even before they are further investable.
Rewards for you? You get ownership at a 5M valuation where future investors are paying higher.
What if the company is valued less than the valuation cap? You get what others get at that stage.
Why SAFE? Because you just have to negotiate the Cap, Sign the doc and wire the money. ZERO legal fees.
One quick question, just want to be sure we are not talking about software. You highlight that patent and if this is software that patent is completely worthless. As long as it is some other technology, presumably physical, you are probably good. But software patents are good and dead.
Better :
No, you **can’t** sell your shares in the future rounds. Your only options are waiting for either an Exit or an IPO.
Investors aren’t buying anyone’s share, the company creates new shares “out of thin air” and sells them, effectively increasing the number of total shares therefore diluting everyone. Everyone’s share will still be valued at the same price but the total value of the company increased because new shares were emitted.
This is a very common misconception about dilution: you aren’t selling, losing your shares or reducing their values. New shares at exactly the same price are created and someone was willing to buy them, your investement in the company is unchanged, the only thing that changed is the % of the company that you owns.
Investors invest in the company to inject cashflow for growth, they usually ain’t allowing thrid parties to exit their positions as it would be cash that isn’t of any use for the company (because it went to someone’s pocket).
In rare cases, investors want to consolidate and will repurchase shares by fragmented third parties that want to exit their positions but it’s not that common.
It depends on what stipulated in the agreements for all parties
The key thing about all this is that there has to be a lot of trust in these rounds. For all the reasons listed above, it’s very easy for F&F to get wiped out round-to-round. From my experience, founders had to give their own remaining equity to F&F down the track.
Future rounds can dilute shares; terms vary per investment agreement.
Yea it’s no cap, straight equity, no conversion. I think as a novice this is what is confusing me. Like How are we landing on value?? He wants $.87 per share.. of an idea..
I mean he’s a good guy but I’m confused to why he would think it’s a good idea to go this route. Does this setup equate to any advantage elsewhere? In series A funding could he set share price higher?
In every round new shares are created. Let’s say the founders have created 1000 shares on day one.
F&F invests money and gets 200 shares in exchange including let’s say 100 for you – so there are now 1200 shares total and you own 100/1200
A seed round happens, the new investors get, let’s say 500 shares – there are now 1500 shares total and you own 100/1500
Then a Series A happens, the new investors gets another 500 shares – now 2000 total and you own 100/2000.
As you can see you keep the same number of shares, never have to sell any, but your % becomes lower and lower as there are more total shares in circulation.