Love Money

Love money is equity contributed to the creation of the company by family, friends, etc., to help the entrepreneur with earning a seed capital. In exchange for these contributions, investors become partners in the created company.

Love Money explained

Originating in the U.S. in the 1960s, love money represents money received as a result of investments by close friends, relatives, acquaintances, etc. in the company founder's project. This sum, which can be compared to relationship savings, can range from a few hundred to several thousand dollars.

The love money contributed to a startup can be presented in the form of a donation or a loan between individuals. They are provided with favorable repayment terms.

Contributions can also be made in the form of an equity interest in the company. Investors then become shareholders in the company in proportion to their contributions.

The amount of these contributions and the names of the shareholders should be stated in a shareholder agreement. If the business doesn't take off and makes a loss, the investor can lose his or her initial investment.

Benefits of Love Money

An investment in love money, in the capital of a relative who creates a business, gives shareholders a number of rights, including the right to receive dividends if the business becomes profitable. They may also have an occasional say in the management of the startup.

In return for the love money invested in the company's capital, they can take advantage of an income tax reduction of 25 percent of the amounts invested but following conditions should be observed.

Shareholders agree to hold all their shares for at least 5 years.

When shares are resold, any gain is subject to capital gains tax, either a flat rate tax of 30% or a progressive income tax scale if that option is more favorable to the taxpayer.

If the entrepreneur has no relatives to fund it, he or she can use a crowdfunding platform.

Advantages and disadvantages of Love Money

For an investor, the main advantage of love money is to give a friend or family member a chance to finance his or her business project. The promise of profit, however, is secondary.

For the creator, these love money contributions are advantageous in that their value is low and they can be mobilized fairly quickly. The total amount of this equity can be used to request additional financing from a bank, to which it provides a guarantee of the seriousness of the intentions.

In both cases, the main disadvantage of love money is that it can potentially pit the creator and some of his relatives against each other if the project fails. This is a pitfall that crowdfunding and its anonymous financing can avoid.