Love Money: What it Means, Angel Investors, Importance

What Is Love Money?

Love money refers to seed capital extended by family or friends to an entrepreneur to start a business venture. The decision to lend money and the terms of the agreement are usually based on the relationship between the parties, instead of a formulaic risk analysis.

Key Takeaways

• Love money is funding raised directly from friends and family.
• Startups requiring love money funding generally do not fit the requirements of traditional financing sources like banks and venture capitalists.
• Both the entrepreneur and investors need to understand the risks involved with love money beforehand.
• Love money investments should only be made with capital that investors are prepared to lose entirely.

Understanding Love Money

Love money is usually given to entrepreneurs by family or friends when no other financial options are available. It may be the only financing option for entrepreneurs who do not meet the criteria for credit from banks or other lenders. Love money may be used to start a new business or provide capital to an existing business when needed.

Love money typically has no fixed repayment terms and can sometimes be given for equity in the venture. It may also be advanced as a loan or a convertible note with a more formal and structured agreement. Regardless of the structure, it is recommended that investors only use risk capital—money they are prepared to lose—when providing love money investments to family and friends.

Angel Investors and Love Money

The people who provide love money may also be considered angel investors, but not always. Angel investors may refer to any high net worth individual who can afford to invest in a risky venture, but it usually refers to accredited investors.

These investors often inject cash into a new venture or when a business needs capital to continue its operations, especially during the difficult early stages. However, they tend to have an expectation of returns and a set exit strategy. To qualify as love money, the angel investor would have to be in the entrepreneur’s social network prior to investing.

Why Is Love Money Important?

Love money is crucial to many business ventures, especially startups. Many of these businesses would never obtain financing through traditional means. For budding entrepreneurs, love money is the best way to get started.

That said, love money is not only for first-time entrepreneurs. It can also be a source of capital for established individuals who cannot secure enough financing. The more advanced a business is, the more formal a love money investment is likely to be.

Does Love Money Mean More or Less Stress?

While it may seem easier to approach people you know for capital, that does not necessarily mean it comes without stress and pressure. In fact, there may be an additional sense of responsibility towards your funders when you know them personally. It is not always easy to mix business with pleasure, so discussing the direction of the business and repayment of the debt can be difficult.

Both parties in a love money transaction should establish clear guidelines and expectations from the beginning to help alleviate pressure and future problems. Make sure both sides are aware of any legal consequences and considerations before any capital changes hands. More importantly, just like any other investor, the funder should be aware of market conditions and the risks associated with investing in the business.

Both parties in a love money transaction should establish clear guidelines and expectations from the beginning to help alleviate pressure and future problems. Make sure both sides are aware of any legal consequences and considerations before any capital changes hands. More importantly, just like any other investor, the funder should be aware of market conditions and the risks associated with investing in the business.