Friends and family

Many founders start with their own savings and money from their personal network. According to the SEC, friends and family usually invest at the pre-seed or seed stage, directly in the company, and deals tend to be the smallest, around $10,000 to $50,000. The money can be a loan, convertible debt or equity. Most friends and family invest because of their relationship with you rather than industry knowledge, so the SEC says founders should take care to explain the risks clearly, including what happens if the business fails.

It is usually a securities offering. Selling shares, convertible notes or other investments, even to relatives, must be registered with the SEC or fit an exemption, whatever the round is called. Common choices:

• Rule 506(b): no public advertising. Any number of accredited investors, and up to 35 investors who are not accredited in any 90 days; each must be able, alone or with an adviser, to judge the risks. If anyone who is not accredited invests, you must give them disclosure documents similar to a Regulation A offering, including financial statements.
• Rule 504: up to $10 million in 12 months, but you must also comply with the securities laws of each state where you offer or sell.

Either way, file a Form D on the SEC's EDGAR system within 15 days of the first sale (no SEC fee), and check state notice filings. Anti-fraud rules apply to anything you say to investors, in writing or out loud.

Loans from family: a loan is simpler than selling shares, but put it in writing, with the amount, interest rate and repayment dates. If the loan charges no interest or less than the IRS's applicable federal rate, tax rules can treat the missing interest as a gift or other payment and as interest income for the lender. Gift loans between individuals of $10,000 or less in total are exempt from those rules in many cases.