Money & relationships: Factors to consider before investing in a friend's business venture
Here are six things you should keep in mind before you decide to collaborate with a friend by investing your money in his startup.
Do not mix business and friendship because you may end up losing both money and the friend. If, however, you have decided to be a part of the venture, here are the things you should check and keep in mind before you put in your hard-earned money.
1. Does he have expertise or experience?
A good friend may not necessarily be a savvy businessman. Before you decide to invest, know if he has been an entrepreneur or has set up business before. If yes, find out how he fared. If he has been successful in a previous startup or venture, he knows the drill and the probability of failure will be lesser. If this is his first time, know if he has sufficient expertise, professional qualification or business acumen to carry it through. Don’t enter into a partnership just because he is a good friend.
2. Is there a business plan? Will you get a return?
The crucial next step is to find out if the friend has a business plan and timeline in place. The plan should be based on market research, and should be detailed enough to tell you how the business will generate money, how long it will take to break even, and how much return it will generate for investors. The details should make it clear if it is likely to be feasible and if you will get a return. Make sure you do not invest without a business plan.
3. What role will you play?
Be clear at the start if you will play an active role in the business or just invest the money and be a sleeping partner. If you decide to be fully involved, there should be a clear demarcation of your role and duties. For instance, if the friend is involved in production and execution, you can take up marketing and sales. A good understanding in friendship may not necessarily translate into the same in business. If the division of roles is not defined, misunderstanding and mis-communication can creep in.
4. Consider all risks and worst-case scenarios
Despite a good plan and high optimism, it is best to be prepared for the worst. Think up all possible risks the venture is likely to face, including the likelihood of failure. In case the enterprise does not take off, have a clear understanding of how you will split and share the losses.
5. Have an agreement, keep all documents
No matter how good your relationship, ensure that every aspect of the investment and business partnership is in writing. Draw up a legal agreement and keep copies of all the documents with you. Also include the course of action to be taken in case the business winds up. If you keep the friendship aside and treat it like a business, it will ensure you don’t lose the friend.
6. Invest only the money you can afford to lose
No matter how good a business plan, there is a possibility that the startup may fail. So put in only the money you can afford to lose. If, however, you do not have any disposable money, it’s good to be upfront and refuse to invest right away.
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All of us have been in a financial dilemma when it comes to relationships. How do you say no to a friend who wants you to invest in his new business venture? Should you take a loan from your married brother? Are you concerned about your wife’s impulse buying? If you have any such concerns that are hard to resolve, write in to us at email@example.com with ‘Wealth Whines’ as the subject.
Disclaimer: The advice in this column is not from a licensed healthcare professional and should not be construed as psychological counselling, therapy or medical advice. ET Wealth and the writer will not be responsible for the outcome of the suggestions made in the column.