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Should parents fund a child’s startup company?

On Behalf of | Dec 5, 2019 | Uncategorized

There are many avenues to explore when an entrepreneur is raising funds for a new business. It is easy to get caught up in seeking investors, financing, partnerships and sponsorships. While there will be many formal business discussions, many people seek a familiar, and less formal, source of funding: they ask their parents for money.

A child asking their parents for money may be a timeless concept, but seed money for a startup is a major commitment. To complicate matters, this often comes later in life. Parents are planning for retirement and paying off the mortgage. They are often saving large sums of money instead of spending it.

Money makes any relationship more complicated. An unpaid loan or bad investment can change even the closest relationship, so it is important to consider a child’s new business investment carefully. A USA Today article explores the topic with four big questions to consider.

The first question is the biggest:

Can I afford it?

If a large loan, gift or investment will put you in a difficult economic position, the answer should be no. Long-term goals should not be sacrificed with retirement on the horizon. There are many ways to help an entrepreneurial child without changing personal plans.

Know where your money will go

As the old proverb says, don’t put the cart before the horse. Before spending a large sum of money, insist on the same information that any other investor would seek: a firm business plan with contingencies, economic forecasts, market and brand concepts, etc.

What is your role in the business?

There are many ways for a parent to give money to the cause. The sum can be a loan, an investment or a gift. Each has different terms. A few issues to determine are interest and repayment; if the investment gives a voice in operations; or if a gift might impact eventual inheritance?

Making it fair for everybody

The first question on the list asks if helping your child is fair to your own future. Beyond that, a family with multiple children needs to consider family dynamics. Jealousy and in-fighting can tear a family apart. Different personality types will respond to the situation in different ways. One suggestion in the article is to consider the payment in relation to inheritance or estate planning, for example.

A question that leads to further questions

Helping a child start a business can have many outcomes. Many well-known companies formed with help from parents, including Amazon and Chipotle, but many others did not enjoy the same success. Any expensive payment — and any business endeavor — requires a lot of thought and preparation. Additionally, there may be tax consequences for investing in a startup that should be addressed with a CPA prior to transferring any money.

Even if a direct gift or investment is not possible, parents can help entrepreneurial children in other ways, such as consulting, sharing resources and identifying legal resources to make success more likely.

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