I received this question recently on Quora.com and thought it was interesting one that often comes up around early-stage startup investment.

Why shouldn’t your investors be a part of your family?

There are three major reasons not to have family members as the primary investors in a new startup. While “friends and family” investments are often an important source of the earliest capital for many startups, there are good reasons to keep this investment small and very early, and to seek outside, independent, third-party, “arm’s length” investors.

1. There is a large risk of failure. Are you OK with losing all of your family member’s investment in your company? Is your family member OK with losing all of their investment in your company? How certain are you of their sentiments about loss now and in the future? Will they feel the same way about a loss if they have disagreed with how you have run the company? If you are not absolutely certain about the answers to these questions, then you should not accept investment from a family member. A family member is someone with whom you would expect to have a long-term and hopefully valuable relationship. Accepting investment funding in a high-risk venture and possibly losing that investment could have dire long-term consequences for your relationship.

2. Negotiating can be difficult with a family member. Negotiating difficult decisions with a family investor can be much more fraught than negotiating with an arm’s-length, third-party investor that you do not see over the dinner table at holidays. Founders and investors are inherently on opposite sides in many negotiations. Their interests are naturally in conflict simply because of the issues involved. Consider decisions to be made about valuation, new investors, dilution, board control, new board members and exit strategy. All of these issues can put early investors in conflict with later investors and with founders. These conflicts need not be rancorous, but they must be carefully negotiated. Having the additional dynamic of negotiating these issues with a family member can make them especially difficult. Even if the negotiations always go smoothly, issues of favoritism between investors can arise if a family member’s investment is seen to be treated more favorably than another investor’s. And if a family member’s investment and involvement is treated exactly as an outside investor’s involvement would be, this can also lead to unmet expectations and could damage your relationship with the family members.

3. Outside investment is good. Finally, having most of your investment – hopefully the vast majority – come from an outside investment party, be that an angel investor or venture capital fund, provides you and your company with independent validation that a family investment cannot. New investors or even acquirers will understand and value an independent investor’s decision to take a chance on you and your company far more than they will an investment by a family member. This independent validation can be extremely important to the closing of early rounds of capital and the long-term success of the company. It is difficult to receive the benefit of this validation from a family member’s investment.

In the end, companies take capital from where they can get it and you want your company to survive and thrive. However, given a choice between accepting a significant capital investment from a family member versus accepting capital from an outside investor, it is almost always worth the extra work and difficulty to take the capital from the outside investor, if possible.