Startup Funding: Raising Early-Stage Capital from Your Personal Network Part 1.

While it’s standard for established investors and firms to ask for guarantees, audits, and strict contract stipulations, less experienced investors may not want to deal with that hassle and can be more willing to let things slide. Therefore, you can get by with fewer qualifications and gain more freedom in operating your business.

Personal connections can also be more flexible when it comes to compensation. This is especially true for close family members, who are personally invested in your success.

Unlike independent investors who tend to make strict demands, friends and family may prefer lenient repayment plans, no or low-interest rates, and perhaps even gift money without any strings attached.

The Securities and Exchange Commission (SEC) enforces legal requirements for investing, which the average person might not meet. In the case of startups, entrepreneurs must be aware of Regulation D requirements.

Regulation D says that a risky investment, such as a startup, cannot be offered to the public. Rather, the investment can only be offered to “qualified investors,” who are people who will not go homeless, go on public help, or become financially ruined if the investment fails.

As of this writing, “qualified investors” include individuals that make $250,000 a year if single for the past three years, or $350,000 a year as a married couple. It also includes individuals who are worth $1,000,000, not counting the value of their primary residence.

Startups can file for exemption from Regulation D requirements, which allows otherwise non-qualified individuals to invest.

For startups to be exempt, they’re required to give a much larger disclosure document that clearly states the risks involved. This is often done in the form of a Private Placement Memorandum (PPM).

A PPM is a large document that essentially is a detailed business plan and legal warnings around all the risks of the startup, including clauses that repeatedly warn the investor that they might lose all their money. It serves as a simultaneous business roadmap and disclaimer to investors.

In addition, a PPM can serve as a legal trail, so when you start working with professional financiers with compliance concerns, there is less retroactive paperwork to deal with.

Raising money from friends and family can truly be beneficial in the early stages of entrepreneurship, when you don’t have the history or experience in the startup world to back yourself up.

But after a certain point, you need to seek the discipline of obtaining smart money, that is money from an experienced startup financier able to help create deals, give advice, and supply contacts in the actual operation of the company.

In addition, friends and family fundraising rounds typically do not provide the large sums of money needed for long-term startup growth. So for Series Seed and especially Series A fundraising rounds and beyond, you should look for professional investors.