TLDR:
A friends and family round is the earliest form of startup funding, where the founder raises capital from their personal network — friends, family, and close contacts — before seeking institutional investors.
Best Practices for Friends and Family Rounds
Even though friends and family investments are informal in spirit, they should be formalized legally to protect both founders and investors. Investments should be documented as convertible notes or SAFEs (Simple Agreements for Future Equity) rather than informal handshakes, clearly specifying the investment amount, conversion terms, and cap. This documentation protects founders from disputes about ownership, provides investors with clear legal rights, and creates a clean record for future investors who will conduct due diligence on the cap table.
Managing Personal Relationships Post-Investment
Common Investment Instruments
Friends and family rounds typically use simpler instruments than institutional rounds: SAFEs, convertible notes, or direct common-stock purchases. Founders should resist the temptation to structure these as informal loans or handshake deals — a year later, when a VC asks for the cap table during diligence, undocumented friend-and-family investments become a source of friction and renegotiation.
Personal and Securities Law Considerations
Even friends-and-family rounds must comply with securities law. Most rely on exemptions for accredited investors or limited non-accredited offerings (Rule 506(b) in the US). Founders should consider whether the relationship survives the failure of the company — a high baseline expectation in venture investing — and ensure investors understand the risk. Documenting suitability assessment and providing meaningful disclosure is a cheap form of relationship insurance.