Funding Your Child's Start-Up: Pros and Cons

The traditional connotation of the phrase, "Investing in Your Children," is paying or saving for their educational future. In this sense, investing is a no-brainer. But what if your children ask for a different type of investment?

As a parent, it is in your nature to do everything in your power to help your children grow into successful and well-adjusted individuals. Unfortunately, there comes a time when the distinction between supporting and enabling may be a difficult one to find. Many college students are struggling for independence after graduation due to the unstable economy and the weak job market.

Our country may be going through a difficult time right now, but one positive is that the status of the economy provides a perfect environment for starting up a new business. Cue: Mom and Dad.

A Different Kind of Investment

When your children come to you with a business proposal that needs funding you could be instantly placed into an uncomfortable position. The New York Times recently wrote about Georgian gubernatorial candidate Nathan Deal, who had made the decision to invest in his daughter's business.

The story starts out with a quick overview of what happened to the Deal family: "Nathan Deal and his wife invested $2 million to help their daughter and son-in-law open an outdoor sporting goods store. They eventually doubled down by guaranteeing bank debt worth $2 million more. The business failed in 2009, the children filed for bankruptcy and their elders are now scrambling to avoid the same fate."

Clearly, the situation is much more complicated than this one paragraph demonstrates, and the family has many issues to work through — especially since candidate Deal is in the media's spotlight.

So what do you do? When it comes to deciding whether or not to invest in your children's business, you should take a few factors  into consideration. The best piece of advice from the start is approaching your decision with your finances in mind. This may be counterintuitive considering parenting is one big lesson in selflessness, but if you invest in the business out of the desire to support your child it could end up harming everyone involved.

A few things to consider:

1. Why are you investing?

It is important to evaluate the reasoning behind making an investment with your child. When individuals reach retirement age many start evaluating their return on investments. If you are unhappy with your current investments and looking to diversify your portfolio, considering the investment with your child is an option. If you had no plans to invest in the first place it could be best just to stay in the "supportive parent" role as opposed to the role of "venture capitalist."

2. Evaluate Risks

We cannot emphasize enough how important it is to look at any potential investment with a business-minded approach. You must not treat your child as a family member, but instead as a business partner. When they come to you with an idea for a new business, ask these questions of yourself and your child:

• Where is the business plan?
• What experience do the founders. a.k.a your children, have in this type of business?
• What is the size of the investment needed?
• What type of risk is associated with this particular investment?
• Can you afford this investment? Think in terms of finances and risk.
• Do you and the founder(s) have the same expectations and outlooks on investing money?

3. Get an Outside Perspective

Whether or not you choose to involve a financial advisor is up to you, but it is extremely beneficial to get a fresh set of eyes to look over the business plan. Involving someone without an emotional connection to the situation might give you a better perspective of whether or not this is a good investment for you and your family. A good piece of advice the article gave said you could, "refuse to invest in the business until someone unknown to the family does. Then, you match whatever that person invests, but no more."

Deciding whether or not you chose to invest with your child's business is complicated. Even though you want to be there for your children and help them succeed, making an improper investment could be detrimental to your finances and your relationships.