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Starting a business is a huge financial responsibility. When you’re just starting up in 2025, you’ll need some cash in your pocket to get the ball rolling. Often, the first people you might turn to for support are your friends and family – what many refer to as the “friends and family round”.
Raising capital means securing funding from others to help your business grow. You can raise capital from friends and family through two main options – debt or equity. Although it might seem straightforward, there is a right way to approach this process.
Too often, startups mistakenly assume that friends and family are an easy opportunity for extra cash. However, even when you’re doing business with loved ones, it’s important to treat them with the same level of professionalism as you would any other investor. For more guidance on setting up your business on a solid legal foundation, check out our Business Set-Up Guide.
In this article, we’ll walk you through how to raise capital from friends and family the right way, ensuring you have up-to-date legal documents and clear agreements in place for a smooth journey ahead.
Debt Or Equity – Which One Is Right For Me?
Your first step is deciding how you want to raise that capital.
There are many ways to secure early cash to get your business up and running. For a broader understanding of financing your business, head over to our Finance Guide. When reaching out to friends or family, your options generally boil down to debt capital or equity capital.
Debt
When you turn to friends and family for debt capital, it usually means you’re receiving a private loan.
There are two types of private loans – secured and unsecured. Put simply, a secured loan uses personal or valuable assets (such as your home) as “security” for the loan, while an unsecured loan does not involve collateral.
Although it may feel like your friend or relative is lending you money purely in good faith, they are likely to have questions about the amount, interest rate, repayment schedule, and potential consequences if the loan isn’t repaid.
To avoid any misunderstandings or strain on personal relationships later on, it’s crucial to set clear ground rules from the beginning and ensure your legal documentation is robust.
The key contract for this arrangement is the Loan Agreement.
If it is a secured loan, you may also need to register the security on the Personal Property Securities Register (PPSR) and consider drafting a separate Security Agreement.
You can find out more about private loans and the appropriate documentation here.
A loan can be a great option if you can comfortably afford repayments and have friends or family willing to lend you money. It’s particularly attractive if you prefer not to give away equity too early.
However, for many startups and small businesses, making repayments can be challenging, and many founders are reluctant to expose personal assets as security.
This is when equity might become a more attractive option.
Equity
Equity raising involves someone investing in your company in exchange for part ownership or “shares” – even if your business isn’t yet profitable. There are different forms of equity investment, including the “SAFE Note” popularised by Y Combinator and the more traditional convertible notes, which we discuss in detail here.
Equity can sound like a win for startup founders: receiving cash upfront without the burden of repayments. However, it comes with the significant trade-off of giving away part ownership of your business. While parting with 10% ownership might seem minimal at present, that 10% could be worth substantially more in the future – money you might have preferred to retain.
This potential upside is precisely why equity investments are attractive to investors. Although they involve high risk, there’s also the chance of a big payoff if your business succeeds.
As you can see, equity raising has its own risks and benefits for both founders and investors. If you decide to pursue equity capital from friends and family, it’s vital to approach it correctly.
So what’s involved in raising equity?
Step One: The Pitch
When you first approach friends and family for equity capital, you need to present your idea just like you would to any professional investor – with a compelling “pitch”.
In startup lingo, a “pitch” is when you outline your business idea, the problem it addresses, and your vision for its future growth. This is your opportunity to convince potential investors to back your venture.
Before your big pitch, prepare three essential items:
First, create a pitch deck – a set of clear, engaging slides that summarise your business idea and vision.
Second, assemble a document pack that includes financial data, market research, or industry evidence to support your business’s viability. These documents lend credibility to your pitch and help ensure you’re not overvaluing your startup.
Lastly, you’ll need a Term Sheet. This document sets out the key terms of the investment, addressing questions like how much ownership the investor will receive, the implications for long-term decision-making, and assurances that their capital is being well allocated.
Having these documents prepared shows your investors that you’ve thoroughly considered how the funds will be used and that you’re serious about establishing a strong, transparent business relationship.
For added protection, you may want to consider signing a Non-Disclosure Agreement (NDA) before discussing sensitive information. This ensures that any confidential details about your business remain secure.
Step Two: Getting It Down In Writing
So you’ve pitched your business and your friends and family are keen to invest – great!
What’s next? Now it’s time to get your legals in order.
To ensure you meet your legal obligations and safeguard both your business and your investors, you need three essential legal documents:
- A Shareholders Agreement
- A Share Subscription Agreement
- An IP Assignment Deed
While this might sound complex, don’t worry – we’re here to break it down for you.
Once a friend or family member comes on board as an investor, they become an official “shareholder”. It’s an exciting milestone, but it’s critical to establish clear rules for this new business relationship. Questions such as “How will decisions be made?”, “What happens if a shareholder wants to exit?” and “How are disputes settled?” all need to be addressed.
This is why a Shareholders Agreement is so important. It outlines share ownership details, the issuance of new shares, dividend policies, and procedures for resolving disputes.
If you already have a Shareholders Agreement, now is the time to review and update it to reflect the addition of new investors.
Next, you’ll need a Share Subscription Agreement. This document specifies the commitment from the new shareholder, including the number of shares issued, any vesting conditions, the timing of the investment, and the share price. Often, a simpler Share Subscription Letter may suffice, but more sophisticated investors might require a comprehensive agreement.
Finally, protect your company’s intangible assets with an IP Assignment Deed. This deed ensures that all intellectual property – from branding to proprietary know-how – is owned by the company. Without this, you risk key IP being tied up with individual shareholders rather than embedded within the business.
As the business landscape evolves, staying updated with current legal requirements is crucial. In 2025, many founders are turning to technology and modern contract solutions. For example, our Contract Review service ensures that your agreements reflect the latest industry standards and regulatory changes while being tailored to your specific needs.
What To Take Away…
We’ve provided a concise guide on how friends and family can help get your business off the ground through both debt and equity funding. It’s vital that these financial arrangements are documented properly to avoid misunderstandings down the track.
Why is this so important? Even when your investors are friends or family, the relationship is ultimately a business one. Ensuring every term is clearly articulated in legal documents protects both parties and creates a framework that supports your business’s growth in 2025 and beyond.
By putting in place structured legal agreements such as a Shareholders Agreement, Share Subscription Agreement, and IP Assignment Deed, you protect your business’s future value and maintain professional investor relationships. This clarity not only safeguards your personal relationships but also positions your business for long-term success.
Remember, seeking professional legal advice early on can save you from potential pitfalls later. Our team at Sprintlaw is ready to help you review and draft the necessary agreements, ensuring that your funding arrangements align with current industry practices and legal requirements. For more insights into the legal aspects of raising capital, visit our Getting Finance section or our Business Set-Up page.
Raising capital from friends and family the right way means establishing a professional business relationship where both sides are clear about their roles and expectations. This not only prevents future disputes but also allows you to enjoy family barbeques without awkward questions about investment terms.
Still don’t understand what all the different legal documents entail? Or need help capturing your capital investments in writing? We’re here to help! Our friendly team can set you up with a consultation with one of our experienced corporate lawyers to advise you on your next steps, or we can get started right away on drafting your legal documents.
You can reach our friendly team at 1800 730 617 or drop us a line at team@sprintlaw.com.au for a free, no-obligation chat.
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