Tips for Your First Friends and Family Fundraising Round
Written By Haley Kopp
For many startup founders, the first injection of capital comes from a Friends & Family (F&F) round. It’s a common first step - less formal than a venture capital round, but it still involves real money, real risk, and real legal consequences. If you're planning to raise funds from those closest to you, here are a few legal tips to keep things clear, compliant, and drama-free down the road.
1. Be Clear About the Risk
Before you take a single dollar, be upfront: investing in a startup is risky. Most early-stage companies fail. Your friends and family need to understand that they could lose their entire investment. This isn’t just about managing expectations. It’s about fulfilling your legal duty to disclose material risks.
Pro tip: Provide your friends and family with a summary of the business, the company goals, how you plan to use the money, and the risks involved.
2. Put It in Writing
Whether it’s a loan or an equity investment, document everything. Verbal agreements are a recipe for misunderstandings. Depending on the type of investment, you may need a:
Convertible Note or SAFE: These are common for early-stage startups who intend to do an equity round at some point in the future. The Convertible Note or SAFE will convert into equity during a future equity round.
Promissory Note: If it’s a loan that will be paid back with interest.
Equity Purchase Agreement: If friends and family are buying stock directly.
Working with a lawyer to draft these documents ensures they’re legally sound and capture the details of the deal everyone intends to make.
3. Follow Securities Laws (Yes, Even for Uncle Bob)
Even if your investors are close friends or relatives, you’re still issuing “securities,” which means you need to comply with federal and state securities laws. Most F&F rounds rely on Regulation D Rule 506(b) or intrastate exemptions. But these regulations still have specific requirements, like ensuring investors are “accredited” or the company having a pre-existing relationship with the investor.
Bottom line: You most likely will need to file a Form D with the SEC and potentially state-level notices. Talk to a lawyer familiar with startup financing to stay on the right side of the law.
4. Avoid Over-Raising
It’s tempting to raise more than you need “just in case.” But with F&F rounds, overfunding can lead to complex capitalization tables, too many small investors, or dilution issues in future rounds. Be strategic: raise what you need to hit your next milestone and not a penny more.
5. Think About Future Investors
Professional investors will scrutinize your cap table. If your F&F round isn’t structured and documented properly (too many small checks, unclear terms, missing documentation), it can slow down or even jeopardize future funding. Keeping things clean now sets you up for success later.
Final Thoughts
Friends & Family rounds are a great way to get started, but they should be handled with care. Legal clarity protects your relationships, your company, and your chances for future investment. Take the time to do it right.
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
