Money Talks, So Should You

Q&A: Should I invest in a friend's company?

Mitch Marsden
by Mitch Marsden , NAPFA

It depends. I personally know individuals who have made great money and profits by investing in their friend’s company/idea or by joining a friend to build a business. However, there are also many who experience not only a financial loss, but emotional losses by getting involved this way.

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Consider the following questions  your answers to them should help guide you to the right decision. 

  • What is your objective in owning the investment? 
  • What risks are you willing to sustain? What risks can you afford to sustain?
  • Will making or not making the investment sour your relationship? 
  • If the company/idea proves to be worthless and you lose all your money, how will the relationship be affected in the future?
  • Are you willing to risk not only your financial investment, but also your friendship?
  • Does your friend have the resources, knowledge, experience, education, etc. to really make something of the company/idea? Especially if it is an unproven idea, be very careful putting money toward it. A lot of great people have great ideas, but managing a company and turning a great idea into a profitable investment is a completely different ballgame and requires much more than a good idea.
  • What kind of involvement would you have in the investment? 
  • Will more money be required in the future? How will you afford that, if needed?
  • How is the friend going to be compensated by his company/idea?
  • What time horizon/objective will the company/idea have before you get money back?
  • How will money be made? How will you be compensated for the risks you are taking?
  • What kind of external financing will the company/idea require? How much debt will need to be taken on and what would your liability be for that debt?
  • What other liability or legal issues could arise with the business and how might it affect you as an investor/owner? Are you willing to sustain those liability risks?

Good luck!

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Mitch Marsden is a member of the National Association of Personal Financial Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.