A couple of years ago I attended a conference where I was struck by something that Honorio Ros, founder of the startup Laexperiencia.com, said, “being from a big family helped me as an entrepreneur”. He explained that thanks to his large extended family, he had convinced some of them to invest in his startup. He was sure that without the economic support from his family, he would not have been able to launch his startup.
The way Honorio received financing is known as the three F’s (or FFF), family, friends and fools. It refers to family members, friends and non-professional investors who like to put up money in risky ventures. For this reason the last F is for fools.
In this cases, entrepreneurs register their company with their own money. After that, the FFF invest in the company paying an extra price for the shares. The extra price is called share premium and it is extra money that the startup receives. This formula allows entrepreneurs to keep most of the capital and be majority shareholders.
Marek Fodor, a renowned entrepreneur and business angel, wrote about this kind of financing in his spanish blog. He said that the FFF financing had allowed him to launch the online travel agency Atrapalo and other startups that he participates in. We can see how important FFF’s can be!
FFF financing are the first investments that entrepreneurs usually get, due to the fact that these people are the closest to entrepreneurs and less demanding in their conditions. In any case, if we are thinking about asking for money from our FFF, below are some pros and cons:
- It requires less bureaucracy and time to receive it.
- The entrepreneur has more freedom to use the money as he sees fit. The FFF normaly don’t control the entrepreneur. This could be a con if the entrepreneur is out of control.
- FFF investments generate confidence in professional investors (business angels and venture capitalists):
- Because if FFF, who know the entrepreneur very well, invest their money, then it seems like it would be a good business.
- Because entrepreneurs will do their best to avoid letting the FFF down.
- They just bring money. We should not expect advice or recommendations about our strategy .
- If any FFF is demanding, it could be a nightmare to deal with him, especially if he doesn’t know anything about businesses.
- And for me the most important of all: If the startup fails, then some FFF can take it personally and the entrepreneur could lose friends.
Financing Pill about FFF:
– Clearly communicate the risks: more than 70 % of startups close in the first years. If it happens, the FFF’s would lose all their money.
– It is better not to accept any money that a FFF could need later. If we accept it, it could be a drama for their domestic finances, if he loses the money he invested.
– Unless the FFF is your mum or dad, a shareholders agreement is an excellent tool to let them know the rules in the company and what they could expect about their investment. This agreement is a private document, which regulates shareholder relationships. It should not be complex. It can stipulate that the FFF’s delegate their voting power to the entrepreneur. A second round investor (business angel or venture capital) can be scares away if the shareholders are a hodgepodge of informal investors, who are impossible to agree with.
– Give them regular reports, that show them how their money is contributing to launch a startup. At least, the FFF’s could get an additional satisfaction to the potential profit.
– If the startup is successful, apart from the earnings they could get, startups should also recognize them for their support.
To learn more:
- Early-Stage Startups Need Friends, Family, and Fools
- Friends, family, fools?
- Don’t Hurt Friends and Family Investors Who Love You
- If you want to know other financial possibilities, I write about them in the following articles: business angels, venture capital and crowdfunding.
Do you know other pros, cons or recommendations? Then you can add a comment. Thanks!