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Friends and Family Funding and Why I'm Dreading Thanksgiving

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Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#51

Post by [deleted] »

mikeash wrote: post #44
rayiner wrote: post #2

Relevant: http://thinkprogress.org/election/2012/04/27/473096/romney-b... . Although it is a weird dichotomy if you think about it. People let parents pay for their college to the tune of $100k+ and don't feel any obligation to justify or defend the investment.

One big difference is that there's way less uncertainty in college. If you're reasonably intelligent and don't goof off, you can turn the money into a college degree almost guaranteed. Business, on the other hand, is inherently a crapshoot, and you can do everything right and still spend all of the money and have nothing to show for it at the end.

[deleted]

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#52

Post by [deleted] »

sokoloff wrote: post #22
001sky wrote: post #17

Earlier quoted context omitted.

The purpose of borrowing from your parents is different, though. The transfer of wealth from parent to sybling via "paying for" college is (as you rightly point out) not really a loan, but a type of "grant". More specifically, its one that is both socially acceptable and tax beneficial[1]. The logic of Romney's positin on borrowing is that it is . That is to say, the parent has more information on the borrower than a…

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 r…

[deleted]

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#53

Post by rayiner »

001sky wrote: post #17
fiatmoney wrote: post #5

Earlier quoted context omitted.

"College" is in this case a proxy for "entrance to the socially-defined middle class". Parents in general (or at least the middle-class ones that would have money to lend/give for college) want their children to be at least as high in the social hierarchy as they are. Financing someone's business is much more of a mercenary decision; "do you run your own business" isn't really a social class marker in the way "did yo…

The purpose of borrowing from your parents is different, though. The transfer of wealth from parent to sybling via "paying for" college is (as you rightly point out) not really a loan, but a type of "grant". More specifically, its one that is both socially acceptable and tax beneficial[1]. The logic of Romney's positin on borrowing is that it is . That is to say, the parent has more information on the borrower than a…

> [1] Gifts over 10k are taxable.

The annual exclusion is $14k per donor per recipient. So a married couple can give at least $84k per year to their three kids (total). But in practice, that's not the relevant limit. Amounts over $14k per donor per recipient per year count against the lifetime exemption, and are only taxed once that exemption is exceeded. Currently, that exemption is over $5 million.

Its true that tuition paid directly to schools is not taxable, independent of any annual or lifetime exemptions, but the high lifetime exemption virtually assures that nobody who isn't extremely rich will ever hit the gift tax even with direct cash gifts.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#54

Post by socialist_coder »

a8i wrote: post #43
socialist_coder wrote: post #20

Earlier quoted context omitted.

I've always suggested this as well. But the truth is, almost everyone is too lazy and doesn't have enough financial discipline to do this. FWIW I've been bootstrapping my startup for the past year and we're finally making a profit.

If you're a single, early 20s engineer in silicon valley, it's nigh on trivial to sock away ~40 k$ in a year. That's easily a year's runway for yourself, or half a year with a cofounder.

Tell that to all the late 20s / early 30s engineers whom I've tried to recruit who have no savings.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#55

Post by gohrt »

emhart wrote: post #26

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, a…

Did you repay 0% of investment, or 100% of principal with 0% interest? The former is awful, the latter is a bit less awful.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#56

Post by gohrt »

rayiner wrote: post #53
001sky wrote: post #17

Earlier quoted context omitted.

The purpose of borrowing from your parents is different, though. The transfer of wealth from parent to sybling via "paying for" college is (as you rightly point out) not really a loan, but a type of "grant". More specifically, its one that is both socially acceptable and tax beneficial[1]. The logic of Romney's positin on borrowing is that it is . That is to say, the parent has more information on the borrower than a…

> [1] Gifts over 10k are taxable. The annual exclusion is $14k per donor per recipient. So a married couple can give at least $84k per year to their three kids (total). But in practice, that's not the relevant limit. Amounts over $14k per donor per recipient per year count against the lifetime exemption, and are only taxed once that exemption is exceeded. Currently, that exemption is over $5 million. Its true that tu…

> but the high lifetime exemption virtually assures that nobody who isn't extremely rich will ever hit the gift tax even with direct cash gifts.

and once you pass $5M, it is simple enough to set up a trust or corporation to give the child control of the funds.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#57

Post by gohrt »

segmondy wrote: post #4

Well, next time, don't raise money from Friends and Family. Raise it yourself. Work for a few years, gain experience, live frugally and save. Then bootstrap with your own money, starting with your own money will really have you think harder than with other people's money.

That's similar to saying "don't get a mortgage, save up and pay cash for a house when you can afford". It is an inefficient way to allocate capital.

Proof: Nearly every large (and many/most small!) business in the world started with a loan or investment.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#58

Post by gohrt »

7Figures2Commas wrote: post #7

> I’m deep into my second pivot, and haven’t yet delivered an exit two years after that initial money. Haven't delivered an exit after two years?!? What's wrong with you?!? Sarcasm aside, while taking money from friends and family may not always be desirable for a variety of good reasons, the problems that arise from it are usually the result of unrealistic expectations. Most companies never achieve an "exit", the av…

A company that is successful enough to still be a going concern 5-7 years later is generally in good enough shape to either pay off the original investment (not converting the "convertible loan"), or make interest payments, or raise new money to buy out the original investors[].

[] In a case like this, buying out the founder's mother is less of a red-flag than buying out the Angel investor.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#59

Post by emhart »

gohrt wrote: post #55
emhart wrote: post #26

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, a…

Did you repay 0% of investment, or 100% of principal with 0% interest? The former is awful, the latter is a bit less awful.

0% it is awful, but at that scale, it is very frequently how things are done. The other common off-off-scale money raising method is to make your actors agree to take responsibility for N# of tickets per performance, so they either sell them, or it comes out of their pay if they can't. Lot of pestering friends to buy tickets to your shows. I was never willing to work for a production that did that, as I wasn't comfortable mixing the work with sales in that way, but in asking for money from friends and family, I don't know that investment was the proper word.

In addition to asking for money from family, I also filed grant applications, and both were treated similarly. None of the people giving had any expectation of a return, but I think they similarly had no expectation that they would ever be asked again, or that we would squander profits as we did.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#60

Post by emhart »

mcv wrote: post #45
emhart wrote: post #26

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, a…

Family and friends gave you that money without expecting it back? And what happened the second time your group asked for money after wasting the first profit?

That's precisely right, it was handled more as a gift/grant and no one was ever (to my knowledge) given the impression that there would be any return.

I do not know the specifics of the 2nd round of begging, but I do know the show they launched had a shorter run in the same theatre, so the amount raised must have been significantly less. They folded entirely very soon after that production closed.

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