Friends and Family Round: How to Raise It the Right Way
For many founders, the first outside money comes from the people who already believe in them: parents, siblings, old friends and former colleagues. A friends and family round can get an idea off the ground, but it mixes money with relationships you care about. This guide shows you how to raise it properly, with the right paperwork, honest expectations and a plan to keep everyone informed.
Key takeaways
- Securities laws apply to friends and family investors just as they do to professional ones. Treat the round as a real investment, not a casual favor.
- Use standard documents, such as Y Combinator's post-money SAFE in the US, rather than a handshake or a homemade agreement.
- Only accept money people can afford to lose, and write down the risks so nobody is surprised later.
- In the UK, SEIS and EIS can give investors income tax relief, and you can ask HMRC for advance assurance.
- Regular, honest updates protect both the business and the relationship.
Here is the tricky part about a friends and family round: the people involved usually say yes because they trust you, not because they have studied your market. That trust is a gift, and it is also a responsibility. If the company struggles, you still want to be welcome at the next family gathering.
The good news is that a little structure goes a long way. Clear documents, a frank conversation about risk and a simple update routine turn a potentially awkward arrangement into a professional one. Let's go through it step by step.
What a friends and family round is
A friends and family round is an early raise, often the very first outside money in a startup, that comes from people in your personal network. It usually happens before you have much traction, when professional investors are not yet ready to commit. Founders use it to build a prototype, test demand, cover early costs or reach the milestones that make a later angel or pre-seed round possible.
It can take several forms. Some founders issue shares directly. Many use a convertible instrument such as a SAFE, which turns into shares at a later priced round. A few accept loans, which must be repaid. Each option has different legal and tax consequences, so it helps to decide early which structure fits your situation. If you are weighing the choices, our guide comparing SAFEs, convertible notes and priced rounds explains the differences.
Is it the right move for you?
Pros
- People who know you may invest earlier than strangers would
- Conversations can be faster and less formal than with professional investors
- Early backers often become loyal supporters, testers and connectors
Cons
- A failed startup can strain close relationships
- Investors may lack the experience to understand the risks
- Messy terms or too many small investors can complicate later rounds
If you are still deciding whether to raise outside money at all, our article on bootstrapping vs venture capital can help you think it through first.
The legal basics you cannot skip
The most important thing to know: offering shares or SAFEs to relatives and friends is still offering securities. The rules that protect investors do not disappear because someone is your aunt. This section is general information, not legal or tax advice. Speak with a startup lawyer, and an accountant where tax reliefs are involved, before you take any money.
In the US
Securities laws apply even to relatives, so most startups rely on an exemption from registration. A common one is Regulation D Rule 506(b). Under it, a company can raise from an unlimited number of accredited investors and up to 35 non-accredited investors who are financially sophisticated, but it then has disclosure duties to those non-accredited investors.
An accredited investor, in simple terms, is someone with income over $200,000 (or $300,000 together with a spouse or partner) in each of the last two years, or a net worth over $1 million excluding their primary residence. Many friends and family investors will not meet that test, which is exactly why a lawyer should help you set up the round correctly.
35
The maximum number of non-accredited, financially sophisticated investors a company can include in a raise under Rule 506(b), alongside unlimited accredited investors.
US SEC, Regulation D Rule 506(b)In the UK
Two tax-advantaged schemes can make a friends and family round more attractive to UK investors:
- SEIS (Seed Enterprise Investment Scheme): a company can raise up to £250,000 in total under SEIS, and investors can get 50% income tax relief on up to £200,000 a year.
- EIS (Enterprise Investment Scheme): gives investors 30% income tax relief.
Companies can ask HMRC for advance assurance that they are likely to qualify, which reassures investors before they commit. Financial promotion rules also apply when you invite people to invest, with exemptions for certified high net worth or sophisticated investors. Check the current rules on gov.uk and with your adviser, as limits and conditions can change.
Common mistake
Taking money on a handshake and "sorting out the paperwork later." Later rarely comes, and when a professional investor arrives, unclear early terms can delay or even derail the round. Sign proper documents before any money moves.
Use standard documents
You do not need to invent your own investment agreement, and you should not. Standard, widely used documents protect everyone because lawyers and later investors already know how they work. In the US, many early-stage founders use Y Combinator's post-money SAFE. In the UK, founders often use standard SEIS or EIS-friendly agreements prepared with a lawyer.
Whichever document you use, make sure each investor receives a copy, signs it, and understands the key terms in plain language. Then record every investment in your cap table straight away, along with the date, amount and instrument.
How to ask, step by step
Asking people you love for money feels uncomfortable for almost everyone. A clear process makes it easier for you and fairer for them.
- Set your target and use of funds. Decide how much you need, what it pays for and which milestone it should help you reach.
- Choose the structure with a lawyer. Agree on the instrument, the terms and the legal exemption or tax scheme before you approach anyone.
- Make a short list. Think about who can genuinely afford to lose the amount they might invest. Leave people off the list if a loss would hurt them.
- Have a one-to-one conversation. Explain the idea, the plan and the risks in person or on a call. Do not pitch to a whole group at a family event.
- Put the risks in writing. Give each person a short summary that says most startups fail, the money could be lost entirely, and it may be years before any return.
- Give them time. Ask them to think it over for a few days. A rushed yes can turn into regret.
- Sign, then receive the money. Only accept funds once the documents are signed, and send a written confirmation of what they invested.
Pro tip
Say the hard sentence out loud: "Please only invest money you would be okay never seeing again." It feels blunt, but it is one of the kindest things you can do. People who hear it clearly make better decisions, and they will remember you were honest.
A friends and family round tracker
Keep a simple tracker so nothing slips through. Copy these columns into a spreadsheet. The rows below are made-up examples.
| Investor | Relationship | Amount (example) | Instrument | Investor status checked | Risk summary sent | Signed | Funds received |
|---|---|---|---|---|---|---|---|
| Investor 1 | Uncle | $10,000 | Post-money SAFE | Yes, with lawyer | Yes | Yes | Yes |
| Investor 2 | Former colleague | $5,000 | Post-money SAFE | Yes, with lawyer | Yes | Pending | No |
| Investor 3 | University friend | £8,000 | Shares (SEIS) | Yes, with lawyer | Yes | Yes | Yes |
Add columns for contact details, the date each document was signed and a link to the stored copy. This tracker also makes it much easier to update your cap table and to answer questions from future investors.
Example
Imagine Tom, who is building a small booking app. He needs an example amount of $40,000 to finish his first version. Instead of saying yes to everyone who offers, he talks to his lawyer, chooses a post-money SAFE, and approaches four people he believes can afford the loss. He gives each one a one-page risk summary and asks them to wait a week before deciding. Three invest, one politely declines, and nobody feels pressured. (Names and numbers are made up for illustration.)
Keep everyone updated
Once the money is in, the relationship has changed a little. Your friends and family are now investors, and they deserve to hear how things are going, especially when things are hard.
- Send a short update regularly, for example monthly or quarterly. Our guide to writing an investor update email has a simple format you can reuse.
- Share the bad news too. Missed targets explained early feel much better than silence followed by a surprise.
- Separate business and personal time. Agree that company questions go to the update or a scheduled call, not every family dinner.
- Keep records tidy. Store signed documents, payment confirmations and update emails in one folder.
Common mistake
Going quiet when the business struggles. Silence makes people assume the worst. A short, honest note about what went wrong and what you are doing next keeps trust intact, even if the numbers are disappointing.
Your friends and family round checklist
- Set a target amount, use of funds and milestone
- Talk to a startup lawyer about the structure and legal exemption
- In the UK, check SEIS or EIS eligibility and consider advance assurance
- Choose a standard document, such as a post-money SAFE
- Write a one-page risk summary for every investor
- Have private, one-to-one conversations and give people time
- Sign documents before receiving money, then update your cap table
- Schedule regular investor updates
Frequently asked questions
Do securities laws really apply to family members?
Yes. In the US, securities laws apply even to relatives, so you need a valid exemption, such as Regulation D Rule 506(b), and the right disclosures. In the UK, financial promotion rules apply too. A startup lawyer can set this up correctly.
Should I use a SAFE or sell shares?
It depends on your country, your plans and any tax schemes involved. Many US founders use a post-money SAFE for speed and simplicity. In the UK, if you want investors to benefit from SEIS or EIS, ask your adviser which instrument fits those schemes before you choose.
What if a family member wants to invest more than they can afford?
Gently say no, or accept a smaller amount. Protecting the relationship matters more than reaching your target faster. Explain that you only want money they would be comfortable losing.
Related reading
The bottom line
A friends and family round can give your startup its first real push, but it deserves the same care as any other raise. Get legal help, use standard documents, put the risks in writing and only take money people can afford to lose.
Then keep your early backers in the loop with honest, regular updates. Done this way, your first investors stay your biggest supporters, and your relationships stay intact whatever happens to the business.
