Love Money

Love Money

Love money is seed capital provided by family, friends, or close contacts to help an entrepreneur start or grow a business. Decisions about providing love money are usually based on personal relationships rather than formal risk analysis.

Key points

• Love money typically comes from friends, family, or people already in the entrepreneur’s social network.
• It can be structured informally (a handshake loan) or more formally as a loan, equity, or convertible note.
• Investors should only use risk capital — money they can afford to lose.
• Clear expectations and formal agreements reduce the chance of relationship damage.

How love money is used

Love money often fills the gap for entrepreneurs who cannot access traditional financing (bank loans, venture capital). Common uses:
* Covering early-stage startup costs
* Funding a runway extension for an existing business
* Proving traction to attract larger investors

Structures include:
* Pure gift (no repayment)
* Unsecured loan with flexible repayment
* Equity stake in the company
* Convertible note or SAFE that converts to equity later

Relationship to angel investors

Some love-money providers act like angel investors, but there are differences:
* Angel investors are typically high-net-worth or accredited individuals who expect financial returns and have formal exit strategies.
* Love money comes from people who know the entrepreneur beforehand; returns and structure are often secondary to the relationship.

Benefits

• Fast access to capital with fewer formal hurdles
• Increased flexibility on terms and timing
• Can demonstrate founder commitment and early validation

Risks and downsides

• Mixing personal relationships and business increases emotional pressure and potential for conflict
• Informal agreements can cause misunderstandings about repayment, ownership, and control
• Family/friend investors may lack experience and underestimate business risk
• Potential tax and legal consequences if not properly documented

Best practices for entrepreneurs

• Treat love money like any other funding source — document terms in writing.
• Only accept what you truly need; avoid over-committing friends or family.
• Be transparent about risks and the possibility of losing the investment.
• Define use of funds, milestones, reporting cadence, and an expected timeline for returns or exit.
• Consider a formal structure (loan agreement, convertible note, equity agreement) as the business advances.
• Seek independent legal and tax advice.

Best practices for investors (friends and family)

• Invest only money you can afford to lose; don’t rely on it for essential expenses.
• Ask for a clear, written agreement outlining the investment’s structure, rights, and exit options.
• Request regular updates and defined milestones to monitor progress.
• Consider independent advice to understand tax, liability, and governance implications.

What to include in a written agreement

• Amount and purpose of the funding
• Type of investment (gift, loan, equity, convertible note)
• Repayment terms, interest, or conversion mechanics
• Equity percentage and dilution protections, if applicable
• Governance rights, reporting requirements, and investor access
• Default conditions, dispute resolution, and exit options
• Tax treatment and confidentiality clauses

Conclusion

Love money can be a vital source of early funding but carries unique interpersonal and financial risks. Clear communication, formal documentation, and realistic expectations from both entrepreneurs and investors help preserve relationships while supporting business goals.