Massachusetts entrepreneurs have many things going for them: Groundbreaking ideas, meticulously prepared business plans and boundless enthusiasm.

But few entrepreneurs have the financial resources to launch their enterprise unassisted.

Attempts to raise money through conventional financing channels for new and untested businesses, particularly in these trying economic times, are often exercises in futility.

Traditional investors and banks alike will almost always regard a new business as “high risk,” regardless of the originality and promise of the venture.

When conventional loans and equity capitalization prove unavailable, mom and dad, aunts and uncles, and even the occasional sibling may be able to bridge the gap. The question is: should they?

Family financing, even when available, may not be the best option for everyone. The simple act of holding a meeting to pitch your new business idea to members of your family or to a close group of friends may test the limits of awkwardness for all involved. Despite the pitfalls, however, many successful businesses have been launched through a loan or capital contribution from a family member or close friend. One notable example is Facebook founder, Mark Zuckerberg, who borrowed money from his parents to fund his company.

Since family dynamics tend to complicate even the simplest initiatives, such as choosing a restaurant for a family gathering, it is essential to understand that if family financing is an available option, it deserves the same degree of careful planning and formality that one would reserve for total strangers.

Keys To Success

The three key elements to successful family financial transaction are disclosure, documentation and performance.

When it comes to building confidence among your family investors or lenders, nothing does more than full and accurate disclosure. Done properly, such disclosure will set the tone for almost everything that follows.

If you are asking for a loan, provide as much detailed information about the new company as possible, including its operating needs, the anticipated “break-even point” and how you intend to ensure timely repayment. Make sure that you and your family members are clear as to the loan amount, the term of the loan, the rate of interest to be paid and the periodic repayment schedule.

If an equity transaction, such as a stock purchase is being considered (which I personally would not recommend for most new businesses), accurate, detailed disclosure is even more essential. In addition, it is crucial that all parties retain competent, independent legal counsel.

The stock purchaser must also be advised of the high risk nature of the purchase and that the entire investment might be lost. The investor should also be advised that “minority shareholders” typically have no control over operational matters.

Don’t Make It Personal

Any loans must be negotiated at arm’s length. The documentation must allow both borrower and lender to revisit the terms of their agreement at any time and know exactly what is expected of them. This objectivity is key to maintaining the trust upon which the opportunity to conduct business with family members was predicated.

The final, and perhaps most important key to successful family financing, is performance. Remember that any family member who is willing to either loan you money or invest in your company is doing you a huge favor.

Treat them exactly as you would treat the bank. Do not miss or delay loan payments because of your relationship. If anything, it is incumbent upon you to ensure, at all costs, that your relative never needs to approach you about a missed payment.

While often warned against, there is nothing inherently wrong about the prospect of raising money through one’s family.

But be warned: Few things can wreck a holiday dinner or family gathering more profoundly than a family deal gone sour. The three pillars of family financial transactions – disclosure, documentation and performance – will greatly increase the opportunity for a successful outcome.

Attorney Barry S. Scheer is a partner and co-founder of Parker Scheer, Boston. Email: bss@parkerscheer.com