Business names ending “and sons” or “and daughters” have always been a cornerstone of the business community. The concept of a family business has long been defined by the handoff of ownership and control from parents to their children.
But the expectation that children will enter and run a family business is eroding. A report by Ernst & Young found that only 3.5% of university students who had the option to work for their parents immediately after graduation actually intended to do so. But more than one-third wanted to start their own business.
Many are looking to follow in the footsteps of Amazon’s Jeff Bezos and Tesla’s Elon Musk, both of whom started their empires with financial support from their parents.
Only about half of all small businesses survive five years and just one-third of companies are around for a decade or more, according to the U.S. Small Business Administration. But this generation’s budding entrepreneurs have a higher likelihood of receiving financial support thanks to a phenomenon known as snowplow parenting, where parents go to ever-greater lengths to shield their kids from failure and frustration by removing the challenges life inevitably serves up.
Choosing whether or not to fund your adult child’s startup is a decision that should take into account both the financial and familial implications of your decision—including the relationship between the parents and the child seeking funding, as well as your relationships with your other children.
A good place for parents to start is by answering these questions:
1
Can you provide funding without compromising your retirement savings? Only invest what you can lose without impacting your retirement savings. Any early-stage investment in a company is inherently risky. The prudent approach is to assume that you won’t earn a return on any funding you provide to your child. Given that most parents with adult children are nearing retirement—a time when financial experts suggest a move toward more conservative investments—first check that you can you still achieve your retirement goals minus the money you provide to your child.
2
Do you believe in the business? It’s virtually impossible for parents to objectively analyze a child’s startup idea. But it’s important to take a critical look at the business concept your child is proposing. What’s the actual size of the market they want to pursue? What are their expected margins, revenues and costs? When do they expect to be profitable? Any professional investor won’t even consider funding an entrepreneur who doesn’t answer these—and many other—questions in a detailed business plan. Parents should insist on the same, and enlist the help of a business savvy friend who can assess the startup idea without the burden of emotion and familial ties.
3
What kind of investor would you be? Parents who ultimately decide that their child has a viable business idea still have questions to answer. One is simply the nature of the financing. Is it a gift that comes with no strings attached? Is it a loan? If so, what’s the interest rate and the repayment schedule? How will failure to repay the loan affect the child’s inheritance? Another possibility is to provide funding in the same way a private equity investor typically would: by securing some portion of ownership in the startup in exchange for the dollars you invest. In that case, you should clearly define what your ownership stake entitles you to. Are you a hands-off angel investor? A board member with voting rights? Do you expect to have a role in the day-to-day management of the company?
Deciding whether or not to invest in any startup company is complex. Add in the parent-child relationship into the mix, and what was already complicated instantly becomes even more fraught. As you talk through the funding possibilities with your child, be sure to emphasize the importance of setting clear expectations upfront—about the business idea, and also the possible strains that could emerge as a result.
Having these conversations before you write a check—and then documenting the agreement in writing—can go a long way toward reducing the possibility of family strife later on. And focusing on the specific details around funding your child’s big idea early on will have an added benefit. It will force your child to be clear on their business strategy, their prospects and the many risks and challenges they face. When that happens, the chances that your child’s winning idea will translate into a winning company can only improve.
A former editor at Los Angeles magazine, Chris Warren’s writing has appeared in publications ranging from Institutional Investor and Forbes to National Geographic Traveler, Oxford American and Greentech Media.
Is it time to stop paying for your grown kids? Get tips on how to break the cycle.