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Why Jay-Z and a Financial Planner Say You Shouldn’t Give Money to a Family Member Who Wants to Start a Business

Jessica Stillman

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Getting help from mom and dad to fund your startup is so common the industry has invented a polite term for the practice — a friends and family round. Some of the world’s most iconic startups-turned-tech-behemoths, including Amazon and Facebook, are reported to originally have gotten off the ground with family money. And it’s also something of an open secret in startupland that coming from generational wealth greatly increases your chances of success.

But not everyone is a fan of the practice of handing out cash to relatives. A resurfaced clip of Jay-Z saying he wouldn’t give a cousin $4,800 to start a business recently made waves on the internet. The billionaire music mogul explained: “It don’t work like that, man. You gotta explain to him life isn’t like that. Money isn’t free, and no one’s giving out opportunities.”

“You going home for solace, you want family, you’re going home for peace of mind,” he added. Being hassled for a loan apparently gets in the way of the homey vibes.

Some fans gave him stick for being stingy, but at least one financial planner is backing him up. Writing in the Financial Times recently, wealth planner Neil Torney made a forceful case against the bank of mom and dad investing in a child’s (or cousin’s) company.

Risks to your finances — and your feelings

Some of the risks he highlights are pretty easy to predict. Injecting money into personal relationships can complicate them, creating misunderstandings and hurt. If parents support a venture financially, they may feel entitled to meddle in it — or have a say in when to pull the plug. Financial circumstances can change unexpectedly with pressure rolling downhill from parents to the business.

Torney also talks about U.K.-specific tax implications. But in the U.S., too, parents and kids would need to think through what kind of bill will show up from the IRS if a parent passes away, and how that eventuality would impact the whole situation, even if it’s incredibly unpleasant to consider.

Other issues raised by Torney are less obvious. Loans from parents to a child, for instance, don’t…

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Jessica Stillman

Top Inc.com columnist/ Editor/ Ghostwriter. Book lover. Travel fiend. Nap enthusiast. https://jessicastillman.com/