Dear Karen: A friend of a friend is starting a company. The founder says that if I put in $5,000 to $25,000, he will issue me a one-year promissory note with 5% interest. Is this how companies like Google get started?
Answer: Many companies, including successful high-tech firms, secure early financing from friends and family. They typically go on to raise substantial additional funding from angel and venture capital investors before becoming public companies or being acquired for large sums, said Mitch Jacobs, chief executive of lender On Deck Capital Inc.
A start-up company is a risky investment, however. Remember that most new businesses fail.
Also, because future investors will want to invest in the company's growth rather than pay off earlier investors, the founder might be pressured to extend your debt.
If you're interested in seed-round investing, consider attending angel investor networking events to get a sense of the range of opportunities available. If you're interested in high-yield debt returns, Jacobs said, consider peer-to-peer lending websites such as Prosper, at www.prosper.com, where you can place many small loans across a portfolio of customers with different risk profiles.
Lending money to friends, family
Dear Karen: How much money should one be willing to invest when asked to participate in a friend's company?
Should paperwork be drawn up with formal legal terms such as collateral? What if a child asks a parent for a business loan?
Answer: A cardinal rule is that you should never loan more money than you can afford to lose.
"If this person is truly your friend, they won't put you in the position" of asking more than you can afford, said Jeffrey S. Fishman, principal of JSF Financial.
If you're making a very small loan, it might not pay to go through the time and expense of drafting legal documents or seeking collateral, unless there's a high possibility of default -- in which case you may want to reconsider. For loans of any magnitude, you should insist that proper documents be drafted and the obligation be collateralized, Fishman said.
Lending money to your children can get tricky, although often parents lend money that they don't expect to see again, Fishman said: "The parents are torn between the urge to do what they can and their financial realities." If you lend money to your kids, make sure you're not financially enabling them to pursue destructive endeavors or hampering them from achieving financial independence.
Looking to expand abroad
Dear Karen: I'm thinking of expanding my product line overseas. Is this a good time, particularly with the low dollar?
Answer: There are certainly opportunities now to take advantage of the falling dollar, which makes U.S. exports more attractive to foreign buyers.
"There are many ways to export, including having buyers from the EU come to the U.S. to purchase from you, advertising overseas or going to domestic and international trade shows that attract foreign buyers," said Mark Sunshine, president of Los Angeles-based First Capital.
Exporting is complicated and can be costly. Research your prospects thoroughly at websites such as Export.gov.
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