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.
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?