The approach is tricky… money and friends and family combined gets sensitive. Maybe your brother asked to borrow money last month and was told no… Maybe you think your friend is loaded but he/she doesn’t feel that way.
So, initially, just keep everyone in the loop. Talk about how excited you are and how huge you think the business could be. Just build excitement. Hopefully someone catches your excitement. Share details about how big the market is and what the tasks are that you need to do and how you plan to do them. Have a really well presented business plan and let them take a look – just to look and see what they think – if they care. They are probably already impressed with you for all your other accomplishments, but showing them a super pro looking 25-pager with all the market research etc can really confirm that you know what you’re doing. Hopefully you can paint a picture where it seems that with just $____ (and hopefully $____ is a number they can afford) you will be able to achieve certain milestones and either be making money or be super attractive to some particular investors.
Show momentum. Mention that you just got cold called from such-n-such vc and he seemed really interested and this other vc wants to meet you for lunch tomorrow and this strategic partner emailed you all these interesting questions this morning and this really experienced person is becoming an advisor and you just signed up your first customer.
Objectively ask yourself if it makes sense for them to invest. Asking has the potential to make things awkward if they feel guilty for saying no, so be judicious. If your friends and family can’t afford to lose $30k, and you’re working on some potentially massive, but objectively risky venture, you probably don’t want to be spending their money.
When the time comes and you absolutely need funding to take any more steps forward and you’ve demonstrated both commitment and competency, your friends and family will probably volunteer. They will be thrilled to help you achieve your goals and optimistic that you’ll make them rich. Only when you sense that they are on the verge of volunteering should you ask.
And when you ask, or after they volunteer, don’t leave it up to them to have a formal agreement. They probably don’t make investments like this all the time and probably know less than you. It’s up to you to prepare the term sheet. Structure it as convertible debt. Start with a 10% interest rate and a 10% discount to conversion or increase one and decrease the other. Convertible debt is good because you don’t need to discuss valuation which can be touchy. Come up with your own term sheet and have a lawyer draft a formal agreement once you have everybody comfortable with the rough terms.