What it means
This is normally the first outside money a company raises, coming after the founder's own savings and before angel investors or a seed fund. Amounts are typically modest, often between $10,000 and $150,000 in total, spread across a handful of people.
The round exists because early ideas are unfundable by anyone applying normal analysis. Friends and family are not really pricing the business, they are backing a person, which is why the share price is usually set by convention rather than by any valuation method.
Mechanically it works like any other share issue. The company creates new shares, sells them at an agreed price, and everyone's existing percentage falls proportionately, so a founder who owned all of the company before the round owns a slightly smaller share of a slightly better funded one afterwards.
The nuance that trips people up is that this money is genuinely at risk and is also illiquid, meaning there is no market to sell the shares in. A friend who invests $20,000 may wait seven years for any outcome at all, and the most likely single outcome is that the shares end up worth nothing.
Many founders now use a convertible note or a simple agreement for future equity instead of issuing shares directly, which avoids setting a formal valuation at a point when nobody can defend one. Either way, the round should be papered properly, since a messy early cap table is one of the fastest ways to complicate a later institutional round.
In practice
Real-world examples.
Example
A bakery founder raises $50,000 from five friends at $1.00 per share, issuing 50,000 shares on top of an existing 950,000. The investors together hold 50,000 / 1,000,000 x 100 = 5%, and the paperwork is a simple subscription agreement drafted by a local solicitor.
Example
A mobile app startup raises $120,000 from family through a convertible note with a 20% discount to the next round. When the Series A prices at $4.00, the note converts at $4.00 x 0.8 = $3.20, giving the family 120,000 / $3.20 = 37,500 shares.
Example
An early supporter of a hardware business buys 3% for $30,000, then sits through two further funding rounds that dilute existing holders by 40% in total. Their stake falls to 3% x 0.6 = 1.8%, which is normal and was explained in writing before they invested.
Formula
Calculation
Shares Issued = Amount Raised / Price Per Share
Post-Money Valuation = Total Shares After the Round x Price Per Share
Investor Ownership % = Shares Issued / Total Shares After the Round x 100
A founder has 3,600,000 shares and raises $100,000 from friends and family at $0.25 per share.
Shares issued = $100,000 / $0.25 = 400,000 shares. Total shares after the round = 3,600,000 + 400,000 = 4,000,000. Investor ownership = 400,000 / 4,000,000 x 100 = 10%.
Post-money valuation = 4,000,000 x $0.25 = $1,000,000, so the pre-money valuation was $1,000,000 - $100,000 = $900,000. If a later Series A prices shares at $2.50, that same 400,000 shares would be worth 400,000 x $2.50 = $1,000,000, a ten times return on the original $100,000 before any further dilution.Case study
Seen in the real world.
Larkspur Kitchens is an illustrative, fictional meal-kit company created to show how these rounds unfold. The founder raised $80,000 from eight friends at $0.40 per share, issuing $80,000 / $0.40 = 200,000 shares against an existing 1,800,000, taking the total to 2,000,000 and giving the group 10% of the company at a post-money valuation of 2,000,000 x $0.40 = $800,000.
Crucially, the founder sent every investor a one-page note before they wired anything, setting out that the shares could not be sold, that further rounds would dilute them, and that the most likely outcome was a total loss. Two of the eight decided the risk was not for them, which the founder treated as a good result rather than a failure.
Six years later the business was bought at $3.00 a share, so the remaining group's 200,000 shares returned 200,000 x $3.00 = $600,000 on the original $80,000, a multiple of 7.5 times. In this fictional example the honest warning at the start was what made the eventual outcome a celebration rather than a settlement of old grievances.
Watch out
Common mistakes.
- Taking money on a handshake and issuing the shares later, which leaves the cap table ambiguous exactly when a professional investor starts reviewing it.
- Setting a flattering high valuation to feel good, which sets an anchor the company then has to beat before a priced round can happen without a down round.
- Letting friends invest money they need within a few years, since this is illiquid capital that may never come back.
Questions
People also ask.
How much should a friends and family round raise?
Usually just enough to reach a specific milestone, often 12 to 18 months of very lean spending, because raising more than that at a low price is expensive dilution.
Should I use shares or a convertible note?
A note or a simple agreement for future equity is often cleaner early on, because it defers the valuation question until a professional investor sets the price.
What do I owe these investors afterwards?
At minimum a short honest update once or twice a year, since they have no other window into the business and silence is what turns a supporter into a problem.
From the founder's library
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