A conversation I heard recently went something like this:
“It's a great business.” I know.
“Look how many customers they have.” I know.
“I only invested £100,000.” Fine.
“My money is safe.” Maybe.
Except one year later, the documents still had not been signed. And then something even more interesting emerged.
The person who had invested believed he was acquiring part of the company. Around 30%. The person who had taken the investment understood the arrangement very differently. His response was essentially:
“No, this is a family business. I can give you 30% of the profits.”
Thirty percent of the company. Thirty percent of the profits. Those are two completely different investments. And somehow £100,000 had changed hands before anybody had made sure both people were talking about the same one.
Friends, Family and Fools
In early-stage investing, the first money a business raises has a well-known nickname: the friends, family and fools round.
It is a joke. And like most good jokes in business, it is uncomfortable because it is accurate. The first money rarely comes from people who have analysed the business. It comes from people who know the founder. They invest in a person, a story and a relationship. Sometimes that is exactly how good companies get started.
But the third word is not there by accident. It does not describe a lack of intelligence. Very intelligent, very successful people end up in that category all the time. It describes a type of decision: one made on trust instead of terms, by someone who never asked the questions that would have been obvious if the same money had gone to a stranger.
The investor in this story was not foolish. He was a friend. The problem is how easily one becomes the other.
The Business May Be Great. That Does Not Mean the Investment Is.
This distinction sounds obvious. It is surprisingly easy to forget.
A restaurant can be full every night. A company can have hundreds of customers. A founder can be intelligent, respected and experienced. A concept can already work successfully in another country. None of those things automatically tell you whether your investment is good.
Because the quality of an investment depends on a different set of questions. What exactly are you buying? Equity? Profit participation? Debt? A revenue share? A contractual entitlement? For how long?
Who determines what “profit” means? When do you receive it? Can earnings be retained instead of distributed? Can the owners pay themselves salaries or management fees before profit is calculated?
Can additional shareholders be introduced? Can your interest be diluted? Can you sell it? Can you get your capital back? Do you have any decision rights? Do you have access to financial information? What happens if the relationship deteriorates?
A crowded restaurant answers almost none of those questions.
Thirty Percent of What?
This is where the story becomes particularly useful. Imagine somebody tells you:
“You will receive 30% of the profit forever.”
It sounds fantastic. Until you ask: what profit? £50,000 per year? £500,000? £5 million?
Before or after salaries? Before or after management charges? Before or after reinvestment? Before or after related-party expenses? Who prepares the accounts? Who decides whether profits are distributed? What happens if the company is profitable on paper but keeps the cash inside the business?
Thirty percent sounds precise. It isn't. A percentage without a clearly defined economic base is just a number.
And people are often strangely impressed by percentages. Thirty percent. Twenty percent. Ten percent. The larger the percentage sounds, the less they sometimes ask what the percentage actually applies to.
But 30% of something undefined is not a return model.
Equity and Profit Share Are Not the Same Thing
This should also be painfully obvious. Yet in informal investments it is exactly the sort of distinction that remains vague until money is already involved.
Owning 30% of a company can mean participation in the underlying value of the company. If the company is sold, your ownership may have value. If the business grows, the value of your stake may grow. Depending on the structure, ownership may also carry information, voting or other shareholder rights.
Receiving 30% of profit is something else. You may own nothing. You may have no claim on the underlying business. You may have no control. You may have no say over a sale. Your return may depend entirely on how profit is calculated and whether it is distributed.
Neither structure is automatically better. But you need to know which one you are actually buying before you transfer the money.
That did not happen here.
“But I Know Him”
And this is where the real investment decision often breaks down.
The investor knew the person. He trusted him. The business looked successful. The story made sense. So the investment felt safe.
That is often how friends-and-family investing works.
Not show me the financials, but I know him.
Not what are the unit economics?, but look how busy the place is.
Not what exactly am I buying?, but he wouldn't cheat me.
Not what happens if we disagree?, but why would we disagree?
The interesting part is that none of this requires anybody to be dishonest. Two perfectly decent people can enter the same transaction with two completely different understandings of what they agreed.
One believes: you are investing in my company.
The other believes: I am becoming an owner of your company.
Those sentences sound similar. Commercially, they may mean completely different things.
Friendship Creates a Due-Diligence Blind Spot
This is what makes friends-and-family investment particularly dangerous. We tend to ask strangers harder questions.
Imagine an unknown person approaches you and says: give me £100,000, I have a good business. You probably ask: What is the revenue? What is the margin? How much debt is there? Who owns the company? What valuation are you using? What am I receiving? Where is the agreement? What are the risks? When can I exit?
Now replace the stranger with somebody you have known for ten years. Suddenly those same questions can feel almost rude.
Don't I trust him? Why am I acting like a lawyer? He is my friend.
And that emotional discomfort quietly lowers the quality of the investment analysis. The closer the relationship, the easier it becomes to replace evidence with familiarity.
A Successful Company Can Still Be a Terrible Place for Your Money
This is another distinction investors frequently miss. You can look at somebody else's company and think: they are doing incredibly well. But from outside, you may have no idea what “well” actually means.
High revenue is not high profit. A full restaurant is not necessarily a highly profitable restaurant. Rapid growth can consume cash rather than produce it. A beautiful office does not tell you the balance sheet. A founder's lifestyle tells you almost nothing about business liquidity.
And this is especially dangerous if you do not understand the industry yourself. If you have never operated a restaurant, for example, you may not understand food cost, staffing, rent, aggregator commissions, wastage, licensing, fit-out recovery, working capital, seasonality, or the margin the business actually retains after everything is paid.
You can still invest. But now you are making a decision in an environment where the person taking your money understands the business considerably better than you do. That information asymmetry matters.
What Else Could That Money Be Doing?
This is another question I think people should ask much more often. Investment opportunities are rarely evaluated against the real alternative.
The investor in this case put £100,000 into somebody else's business. But what else could that money have done?
Could it have been invested into his own company? Could it have reduced debt? Created working capital? Purchased an asset? Remained liquid until a stronger opportunity appeared? Could it have been invested somewhere where he had more control, more knowledge or greater transparency?
The question is not simply:
“Is this business good?”
It is:
“Is putting my money here better than the other things I could realistically do with the same money?”
That is an investment decision. Everything else is enthusiasm.
Before You Invest in Someone You Know
If you are considering putting money into a friend's or relative's business, I would want clear answers to at least these questions.
What exactly am I buying? Ownership, debt, profit participation or something else?
What percentage applies to what? Thirty percent of the company and thirty percent of profit are not interchangeable.
How is the business valued? If £100,000 buys 30%, what does that imply the entire company is worth, and why?
What are the actual economics? Revenue, costs, profit, liabilities, cash flow.
Who controls the money? And what decisions can be made without your consent?
What information will you receive? Accounts? Bank statements? Management reports?
How and when do you make money? Dividends? Interest? Revenue share? Capital appreciation?
What happens if the company needs more cash? Do you invest again? Does your position dilute?
What happens if you want out? Can you sell? To whom? At what valuation?
And where is all of this written down?
If the answer to the last question is “we will sort the paperwork later”, I would stop there.
The paperwork is not the administrative part of the investment. It is the investment.
The Best Time to Challenge an Investment Is Before You Fall in Love With It
Most people do not need somebody to tell them: this looks exciting. They already know that.
The useful person is often the one who asks: Why 30%? Thirty percent of what? Where did this valuation come from? What exactly do you control? What happens if profit never gets distributed? Why are you assuming customer volume equals profitability? Why are you putting money into an industry you do not understand? What other uses of this capital are you giving up?
And perhaps the most uncomfortable question:
If this opportunity had been offered to you by a complete stranger, would you still invest on these terms?
That question alone can change the way a deal looks.
Sometimes You Need Your Assumptions Challenged Before You Transfer the Money
This is exactly the kind of decision where independent analysis can be useful. Not investment advice. Not a recommendation to buy or not buy. And not a substitute for legal or financial due diligence. But a structured challenge to the logic behind the decision.
That is something I can do through a Decision Logic Snapshot.
We can look at what you believe you are buying, what you actually know, which assumptions are doing most of the work, what questions have not yet been answered, what alternatives exist for the same capital and which risks are currently being hidden by familiarity or enthusiasm.
Because when money is about to move, one of the most expensive sentences in business can be:
“Don't worry. I know him.”
The earliest round has its nickname for a reason. You can be the friend. You can be the family. Just make sure you are not the third.