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Starting a business in 2025 is a huge financial responsibility.
When you’re just starting up, you’ll need some cash in your pocket to get the ball rolling.
The first people you might turn to for support are your friends and family – what we now often refer to as the “friends and family round”.
Raising capital means obtaining funding from others to help your business grow, and it remains a popular strategy even in 2025.
You can raise capital from friends and family through two main avenues – debt or equity.
Though it might seem simple, there is a right way to raise capital from friends and family, ensuring all parties are treated professionally and fairly.
Too often, startups err by assuming that friends and family represent an easy opportunity for a quick cash infusion without the necessary formalities.
But even when dealing with friends and family, you must handle the process with the same level of professionalism as you would with any other investor.
In this article, we’ll walk you through how to raise capital from friends and family the right way, in line with the latest practices for 2025.
Debt Or Equity – Which One Is Right For Me?
Your first step is deciding how you want to raise that capital.
There are several ways to generate early cash to get your business off the ground. However, when you turn to friends or family, your options are generally limited to debt capital or equity capital.
Debt
When you approach friends and family for debt capital in 2025, it usually means you’re securing a private loan.
There are two types of private loans – secured and unsecured. Put simply, a secured loan requires personal or valuable assets (such as your home) as collateral, whereas an unsecured loan does not.
Taking a loan from friends and family is always a risky proposition. While it might appear that your friend or relative is lending money purely in good faith, they may still have valid concerns regarding the specifics.
Questions like: What is the exact loan amount? What interest rate applies? When will repayment be made? And what happens if the loan isn’t repaid? are all important considerations.
To prevent any misunderstandings and to maintain both your business and personal relationships, it’s vital to formalise the arrangements with clear, legally binding documentation.
The document typically required is a Loan Agreement. This contract sets out all the terms of the loan, ensuring both parties have a clear understanding of their commitments. For more details on drafting effective agreements, you might find our guide on legal documents for business particularly useful.
A loan is an attractive option if you’re confident in your ability to make repayments without overburdening your cash flow, and if you prefer not to dilute your ownership too early on. However, for many startups and small businesses, the reality is that repayments may be challenging, and risking personal assets might not be advisable. In such cases, equity may be a more appealing alternative.
Equity
Equity raising involves someone investing in your business in return for a stake, or “shares”, even if your business isn’t yet profitable. In 2025, this method remains popular among startups looking to capitalise on growth opportunities without the pressure of scheduled repayments.
There are also variations of equity instruments. For instance, the “SAFE Note” (Simple Agreement for Future Equity), which was introduced by Y Combinator over a decade ago, remains a favoured option in 2025, alongside the more traditional convertible notes.
While raising equity can inject essential funds into your business without the pressure of immediate repayments, it does require you to share ownership. Even a modest share, say 10%, could be worth a substantial sum as your company grows – money you might otherwise retain. This is why equity is such an attractive proposition for investors: the risk is high, but the potential returns are significant.
As you can see, equity capital comes with its own set of advantages and risks for both founders and investors. So, if you decide to raise equity from friends and family, it’s important to manage the process meticulously.
So what does raising equity involve?
Step One: The Pitch
Your initial approach should mirror that of any formal investor pitch. Clearly articulate your business idea, the problem it solves, and your vision for its future growth.
This pitch is your opportunity to convince your friends and family to invest in the potential of your startup.
Before stepping into the pitch meeting, ensure that you’ve prepared three key items:
Firstly, develop a compelling “pitch deck” – a set of clear, engaging slides that succinctly outline your business plan.
Secondly, assemble a pack of supporting documents, including financial projections and industry data, to substantiate your business’s viability. You can find helpful guidance on these aspects in our business structure guides.
Lastly, prepare a Term Sheet, which sets out the fundamental terms of the investment, such as the ownership percentage, investment amount, and investor rights. This document is crucial for answering investor queries and establishing a transparent relationship.
By having these documents in place, you demonstrate thorough preparation and seriousness, helping to reassure your potential investors that their capital is in safe hands.
Step Two: Getting It Down In Writing
Once your friends and family are enthusiastic and ready to invest, the next crucial step is to ensure that all agreements are formalised legally.
To meet your legal obligations and protect all parties, you will need the following key documents:
- A Shareholders Agreement
- A Share Subscription Agreement
- IP Assignment Deed
Although these terms may sound technical, they are essential. Once a friend or relative comes on board as a shareholder, it’s vital to define the terms of this new business relationship:
- How will decisions be made?
- What is the process if a shareholder wishes to exit?
- How will disputes be resolved?
Even when working with those close to you, establishing these ground rules via a Shareholders Agreement is crucial. It not only clarifies expectations but also helps maintain healthy business relationships as your venture expands.
A Shareholders Agreement outlines everything from share ownership and dividend payments to the issuance of new shares and dispute resolution procedures. If you already have an agreement in place, you may need to update it to accommodate new investors.
Following that, you will require a Share Subscription Agreement which details the terms under which new shares are issued – including the number of shares, any vesting conditions, timing, and price.
Finally, protect your intellectual property with an IP Assignment Deed. This legal instrument ensures that all key IP assets, from your branding to your proprietary processes, are owned by the company – safeguarding the long-term value of your business. For further information on protecting your IP, see our Intellectual Property guide.
What To Take Away…
We’ve provided a comprehensive overview of how friends and family can help raise capital through both debt and equity channels. The key is to underpin these financial arrangements with the proper legal documentation.
Why is this so important? Even if they are your closest allies, the arrangements you enter into are ultimately business relationships – clarity in written agreements is essential.
Having solid contracts in place helps prevent disputes over agreed terms and can save you significant headaches in the future, especially as your business grows and evolves.
This ensures that both you and your investors have confidence and clarity in your business relationship, allowing you to focus on growth rather than contentious disputes.
Raising capital from friends and family the right way means establishing a professional, transparent relationship, so you can even enjoy family barbeques without any awkward financial questions.
Still not clear on what all these legal documents entail, or need assistance in getting your agreements in writing? Our friendly team is here to help.
We offer a Corporate Lawyer Consult service to advise you on your next steps, and we can get started right away on preparing your legal documents. For additional insights on protecting your business and successfully setting up your company, check out our resources on Company Set-Up and our Intellectual Property guide.
You can reach our dedicated team via email at [email protected].
In 2025, with the rapid evolution of digital processes and the increasing use of e-signatures, formalising these legal agreements has never been easier or more secure. Digital platforms now enable faster turnaround times and help reduce the risk of human error, ensuring that your contracts remain up-to-date and compliant with the latest regulations. At Sprintlaw, our updated approach embraces these technological advancements, offering streamlined services that combine modern innovation with our trusted legal expertise.
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