Friends and Family Funding and Why I'm Dreading Thanksgiving

Ref: 1: Assuming US law, the annual gift tax exemption is $14K (per [giver, recipient] pair, so a couple may gift $28K to a single recipient, or $56K to another couple), there's a process to combine 5 years' worth at once, and amounts over the annual exemption limit count against a lifetime exemption and then are taxable to the donor.

I can't fund any ordinary circumstance under which a gift would be taxable to the recipient.

http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Empl...

There's a reason why this kind of funding is generally referred to as "Friends, Family and Fools".

This is an anecdote, not a great insight, so feel free to skip:

When I was starting a small theater company in NYC with some friends we raised money for our first off-off-broadway ("broadway", "off" & "off-off" are a definition of seating capacity, btw, not geography) show, we turned to friends and family for our funding. This was very much the norm when you were just starting out. Usually these were small amounts, aiming to raise maybe 5-7 thousand dollars total, often even less, all depending on location & run of the show.

Anyway, we raised a few thousand, put on a great show of original one acts from writers and directors in our own company and it was shockingly well received. In the end, we actually managed to turn a few thousand dollars profit, which was less typical. In the meetings we had afterward with what to do with the money, everyone but myself and one other partner were blatantly treating it like a lottery win. A completely unencumbered windfall with which we could just buy beer for a year if we wanted. It was infuriating.

For me, and the other partner (who both left the company due to these and related issues soon after) we felt that while we may not owe that money back to the family that supported us, we at least owed it to them to keep it rolling. Instead, we rented out office space on 42nd street for ~6 months and never did anything more than use it as a storage unit. Most expensive storage unit you could find in the city.

Finally, the time had come to put up our next show, a full-length new work by one of our best writers, and with absolutely 0 compunction 7 of the partners enthusiastically recommended we return to the friends and family well. There was nothing left of our profit and no one cared. After the first show we had enough to mount the second, had we just set it aside for that purpose.

That was my first real experience in small business and unfortunately I was too young and angry to properly learn those lessons at the time. Took me another 8 years to really comprehend what we had done.

Edit: Faulty memory, updated for accuracy.

I turned down friends who wanted to join our raise at Goalee for this exact reason. That, and I wasn't convinced that they were fully aware that you only invest in a small start-up what you can afford to lose. They guy was getting a doctorate in piano performance, and I didn't get the sense that they had a lot of extra in their lives (especially considering their three kids).

Best decision I ever made.

If you're young and not in an area where people are used to paying market rates for development work (read: the midwest), doing contracting work is not a silver bullet.