Friends and Family Shares - Explained
What are Friends and Family Shares of Stock?
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Table of ContentsWhat are Friends and Family Shares?How are Friends and Family Shares Used? Pros of Friends and Family SharesCons of Friends and Family SharesAcademic Research on Friends and Family Shares
What are Friends and Family Shares?
Friends and family share refers to a program that offers a company's shares to persons such as employees, friends, and family before the company is listed. The program allows these individuals to have a stake in the business, which enables them to generate wealth for their loyalty and hard work. These shares usually cover a small percentage of the company's total shares. The percentage offered by most businesses is usually below 5%.
Though the portion may seem small, it creates significant returns for the holders.
- Friends and family share refers to a program that offers a company's shares to persons such as employees, friends, and family before the company is listed.
- These types of shares represent a small percentage of the company's total shares (usually less than 5%).
- Friends and family shares form of financing is applicable only to those entrepreneurs who have access to friends and family with higher socioeconomic status.
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How are Friends and Family Shares Used?
Basically, friends and family shares are considered the easiest alternative for raising funds to finance a business. Most new businesses do not meet the required threshold, which enables them to raise capital using other available financing means. So, family and friends become the first point of contact for sourcing capital to kick start their business operations. If during the Initial Public Offer (IOP) such shares are flipped, they create higher returns for the shareholders. Friends and family shares method of business financing was widespread in the United States in the 1990s. However, due to the Securities and Exchange Commission (SEC) interference as well as legal restrictions, the program has become less prevalent. The SEC has been keener on the friends and family shares effects.
Pros of Friends and Family Shares
In theory, family and friends are generally understanding. They are, therefore, more than willing to financially support your business, even though the move appears speculative. They are not like the bank who will demand to see the business revenue and or asset history before they consider lending you their money. In addition, it is less costly when friends and family finance a business. There are no additional costs, such as interests. However, it is not the case with bank loans, where you are supposed to pay interest on every loan they offer. Some financial support may even see you giving up a good portion of your equity ownership.
Cons of Friends and Family Shares
You are bound to encounter problems if friends and family finance your business. The major problem is that there is a possibility it will lead to tension in a relationship. Generally, when people invest in a business, they obviously expect returns from their investment. The situation is not different when it comes to friends and family who invest in your business. So, if the business happens not to do well, the situation may lead to a bitter relationship. In other words, there is always mistrust when efforts are not rewarded. Also, this method of financing is applicable only to those entrepreneurs with access to friends and families with higher socioeconomic status. Those without such access are always left out of such a form of capital financing.
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