Co-investing with Friends – A Fruitful Venture or a Friendship Risk?
Co-investing with friends can be a challenging dilemma. On one hand, there are the potential financial benefits of sharing good investment opportunities with friends. On the other, there exists the risk of damaging these friendships should the investment venture not perform as expected. This blog post aims to answer a question from our reader, Daniel, regarding this concern.
Understanding Co-Investment
Co-investing with friends requires a clear understanding and alignment of goals. In my book, Magnetic Capital, I discuss the five pillars of a solid investment, which are a strong relationship with the deal sponsor, unwavering trust in the sponsor, clear track record of the sponsor, compelling opportunity, and most importantly, alignment between project goals and investment goals. Without these pillars, especially the last one, co-investing can quickly turn sour.
The Power of Diversification
Investing as a group can also yield the advantage of diversification across multiple investments. For instance, if the minimum investment for private offerings is a substantial amount, say $100,000, you might not have enough to invest individually. By pooling resources with friends, you can diversify your investments which should, in theory, lower your overall risk. However, it is worth noting that these offerings often require accredited investors and including a non-accredited investor could limit your investment eligibility.
Investing Independently
One approach you might consider is sharing opportunities with friends and investing independently. You can collaborate on the due diligence process, leveraging the collective experience and expertise of your group, to vet the investment opportunity effectively. This strategy lets you share the work and benefit from the input of others while avoiding the potential complications of co-investment.
Establishing a Co-Investment Club
If you’re set on co-investing, consider creating a little co-investment club with a set of basic governance rules. Each member of your club could commit to contributing set hours of due diligence on every investment, which allows for a more rigorous and thorough evaluation of potential opportunities.
However, before moving ahead, it’s necessary to have an open conversation about your respective investment goals and risk profiles. Ensure that you’re all investing with a similar risk appetite and that everybody is willing to contribute equally towards the due diligence process.
Remember, co-investing with friends can be beneficial. But without having tough, honest discussions ahead of time regarding expectations, goals, and risks, it can quickly devolve into a nightmare. So, set the ground rules, open communication channels, and ensure you’re all on the same page before taking the plunge.
Legal Disclaimer
It’s important to note that I am not a lawyer, and this advice should not be considered legal counsel. Consult your own legal team for formal advice before deciding to co-invest.
Thank you, Daniel, for this excellent question. And to all the readers, may your investment ventures prosper and your friendships thrive.
