Accepting Startup Funds from a Co-Worker

Q: A friend of mine who’s also a co-worker has offered to lend me money to start my business. Do you think that’s a good idea?

A: As Shakespeare wrote, "Neither a borrower nor a lender be, for loan oft loses both itself and friend." That’s doubly true of borrowing from a co-worker. Whether your business succeeds or fails, you still need to work together--which may be difficult if your business goes south.

That’s why it’s important to do some serious soul searching before asking a colleague for startup capital. For example, does your co-worker know anything abut the business you wish to enter or about business in general? It's important that your colleague understands the risks involved in starting a business. That's especially true of a business such as a restaurant or retail store that requires a large capital investment and spot-on execution. A co-worker who knows the industry you’re about to enter and understands the possible setbacks involved in starting and growing a business will make a much better financial backer than someone who’s never ventured outside his corporate cubicle.

It’s also important to hammer out the terms of the deal ahead of time and put your agreement in writing. For instance, is your co-worker making a loan that he expects to be paid back or is he investing capital in exchange for equity? If the money is being put in as debt, is your co-worker looking for a personal guarantee that leaves you on the hook for repayment if the business goes bust? Will repayment begin when your company starts generating revenue, at break-even or after your company hits profitability?

"Fouling this nest, even accidentally or through misunderstanding, can be catastrophic," says Joseph Fulvio, a Doylestown, Pa., new market and new business development specialist who works with startups and emerging companies in the U.S. and Asia. "As with office romance, the question isn't so much about getting involved as about what to do once it happens and what to do afterward."