A guide to friends and family funding for startups

Key takeaways:

Friends and family funding can be structured as a business loan, an equity investment, a convertible note, or a tax-free gift from a family member.
Startups should generally commit no more than 10% to 15% of their equity in a friends and family round of fundraising.
The target amount for a family round is typically between $50,000 and $500,000. Seed round targets are $1 to $3 million.

What is friends & family funding?

A friends and family round of funding precedes a pre-seed or seed round with professional investors. Startup founders ask friends and family for funding to get their business going. The strength of those personal relationships is the foundation upon which these deals are made. It’s also the biggest risk factor.

Family funding can be loans with or without interest rates or equity investments. In rare cases, it can come in the form of a gift. An example is a parent funding a business for one of their children—the Internal Revenue Service (IRS) increased the annual gift tax exclusion to $19,000 for 2025.

Aside from gifts, friends and family startup funding is like any other debt or equity financing. It’s a form of crowdfunding that a founder or co-founder can use to execute their business plan, eliminating the need to bootstrap the business on their own. Family investors and friends who buy into the business concept can become early-stage mentors and partners.

Friends and family could also be potential investors in future rounds, like a seed or Series A round that comes later in the evolution of the business. Cultivating those relationships in the early business stages could stabilize the company and improve cash flow when you need it most.

How to structure friends & family investments

Friends and family funding can be structured as a business loan, an equity investment, a convertible or SAFE note, or a tax-free gift from a family member. Each of these options has benefits and drawbacks. Some are debt vehicles that require repayment, while others are funds exchanged for equity or a promise of equity. Here’s a breakdown of each:

Business loans: A family loan could be structured with or without an interest rate, but it should have a repayment schedule that both parties agree on. The payments can be fixed or variable based on business revenue. Interest rates should be based on the amount of risk the investor is taking by lending money to the business.

Equity investments: Exchanging funds for equity isn’t limited to accredited investors, venture funds, and angel investors. Friends and family might want a piece of the company, too. Many startups commit 10% to 15% of their equity in a family funding round that will raise anywhere from $50,000 to $500,000.

Convertible notes: A convertible note is a short-term debt instrument structured as a loan that’s convertible into equity. These are a common way for startups to raise funds that don’t get paid back until the business is successful. Convertible notes typically convert at the end of a Series A round of financing.

SAFE Notes: A Simple Agreement for Future Equity (SAFE) note is a promise of future equity made to an early-stage investor. The two components of a SAFE note are a valuation cap that limits how much the investor can receive and a discount rate that allows them to convert to equity at a discounted price.

Family gifts: We briefly discussed this option earlier. A family member can give another family member a gift of up to $19,000 (2025 limit) without paying gift tax on the money. A gift generally doesn’t require repayment.

Every fundraising arrangement should be accompanied by a written agreement that includes term sheets with liquidation preferences and a repayment schedule. Handshake deals might seem appropriate for family members, but a written contract solidifies the deal and prevents internal problems of legal actions if the two parties have a conflict.

Challenges and risks

Structuring early-stage friends and family funding as a loan puts the company at risk of defaulting on debt if the business fails. The investor takes a risk because they may not get repaid without taking legal action against the owner. That scenario can also be a personal challenge if the owner is a family member or close personal friend.

Equity financing doesn’t have the same risks as debt financing, but surrendering equity is giving away ownership stake and control. The dilution of existing shares in an equity deal could also alienate existing shareholders and reduce the amount of equity the company can use in the next fundraising round, limiting the post-money valuation for the round.

Convertible notes show up on the cap table and can cause dilution when they’re converted. The valuation cap on SAFE notes also limits post-money valuations, making it a less attractive option than other forms of financing on this list.

Comparison with other funding options

Family members are likely to offer a better interest rate on a loan than venture capital firms. They’ll also take a smaller equity bite without demanding management control of the business. Venture capitalists typically restructure the business entity and ask for common stock with voting rights. Friends and family equity deals should be structured with preferred stock.

Business loans from traditional banks and credit unions go through an approval process that early-stage businesses are unlikely to get through. The business owner may be able to get a personal loan if their credit score is good, but the business would then be indebted to its owner.

Angel investors may also want an equity stake in the business, but they usually don’t want management control. Most angel investors take a hands-off approach to their investments, preferring to stay in the background and allow the business to generate a return for them. Unlike venture capitalists, angel investors will often invest before proof of concept.

Crowdfunding platforms can help startups raise money without taking on debt or surrendering equity. The downside is that your idea needs to be compelling and unique to attract enough attention for a reasonable fundraising round. This option is best for established companies launching new products or services.

Wrap up

Friends and family funding is an option for raising pre-seed money for your startup. The amounts you can get in a family round aren’t typically large enough for a seed or series A round, but they can give you the operating capital to grow your business to the next level. Some family-round investors might be willing to invest again in the next funding round.

Founders can structure friends and family funding as a business loan, an equity investment, a convertible note, or a tax-free gift from a family member. There are pros and cons to each of these. Before you seek out an investment from friends and family, consider its pros and cons to determine whether it’s right for you.

Kevin Flynn is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.

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