How to Ask for a Friends and Family Round: Scripts and Strategies That Work

The landscape for early-stage fundraising in Hong Kong shifted materially in late 2024 when the SFC and HKMA issued a joint circular on tokenised securities and the use of blockchain for capital formation (SFC/HKMA Joint Circular, 28 November 2024). While the circular primarily targets regulated investment products, its practical effect on pre-seed and friends-and-family (F&F) rounds is a sharpened regulatory lens on how founders document equity-like instruments. Simultaneously, the Hong Kong government’s updated tax concession for qualifying family offices (Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2024) has created a new pool of sophisticated capital that is structurally more accessible to seed-stage ventures than traditional angel networks. For founders sitting on a prototype and a cap table of zero, the F&F round is no longer just a polite ask of relatives—it is the first formal test of their ability to navigate a tightening regulatory environment while preserving founder control. Getting the ask wrong—structurally, legally, or conversationally—can seed mispricing, cap table friction, and future compliance headaches that a Series A term sheet cannot easily unwind.

Why the F&F Round Demands a Script, Not a Conversation

The F&F round occupies a unique regulatory grey zone in Hong Kong. Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), an offer of shares or debentures to the public requires a prospectus registered with the Registrar of Companies. However, Section 38D provides an exemption for offers made to “professional investors” as defined under the Securities and Futures Ordinance (Cap. 571, SFO). The SFO defines professional investors as individuals with a portfolio of not less than HKD 8 million (Section 1, Part 1, Schedule 1). A founder’s uncle with HKD 3 million in savings and a genuine belief in the business does not qualify. This statutory gap is the single most common source of inadvertent regulatory breach in Hong Kong seed rounds.

The structural risk of an unscripted ask. When a founder approaches a family member without a prepared script, the natural conversational drift tends toward verbal promises of “shares” or “equity” without the corresponding legal framework. The SFC takes the position that any oral offer of securities to a non-professional investor, if accepted, constitutes an unregistered prospectus offer. The penalty under Section 342E of Cap. 32 is a fine of HKD 500,000 and imprisonment for three years. The SFC Enforcement Division’s 2023 annual report noted that 14 of 38 enforcement actions involved unregistered offers of securities, with two cases originating from F&F rounds that had scaled beyond the statutory exemption limits.

The cap table cost of a bad conversation. A poorly structured F&F round—where a founder issues convertible notes with no maturity date, no interest rate, and no conversion discount—creates a liability on the balance sheet that later investors will discount. The Hong Kong Venture Capital and Private Equity Association (HKVCA) 2024 Deal Terms Survey reported that 68% of seed-stage investors in Hong Kong now require a cap table clean-up as a condition precedent to their investment. A clean-up triggered by an F&F round that was documented as a simple loan agreement between a founder and their cousin typically costs between HKD 50,000 and HKD 150,000 in legal fees, depending on the number of noteholders and the complexity of the conversion mechanics. The script is not about politeness; it is about avoiding a six-figure legal bill before the company has revenue.

The conversational mechanics of a professional ask. The script must achieve three objectives: (1) establish the investment as a formal transaction governed by a subscription agreement, not a personal loan; (2) set clear expectations on valuation, dilution, and liquidity; and (3) create an opt-out mechanism that preserves the relationship if the family member declines. A script that opens with “I’m raising a friends-and-family round for my company, and I want to offer you the opportunity to invest on the same terms as our lead investor” frames the conversation as a professional capital allocation decision rather than a request for charity. The term “lead investor” can refer to the founder themselves if no external lead exists, but the language of a structured round signals seriousness.

Structuring the Ask: Valuation, Instrument, and Cap Table Hygiene

The F&F round in Hong Kong has a standardised set of instruments that align with market practice and regulatory expectations. The HKVCA and the Hong Kong Institute of Chartered Secretaries (HKICS) jointly published a model convertible note term sheet in March 2024 that is now the de facto standard for sub-HKD 2 million rounds. The term sheet specifies a valuation cap, a discount rate (typically 15-25%), a maturity date (18-24 months), and an interest rate (5-8% per annum). Founders who deviate from these norms—for example, by offering a flat equity price with no discount—will find later institutional investors demanding a repricing.

Valuation methodology for a family round. The most common error in F&F rounds is over-valuation driven by emotional attachment. The Hong Kong Business Angel Network (HKBAN) reported in its 2024 Annual Survey that the median pre-money valuation for a Hong Kong-incorporated seed-stage company with no revenue and a working prototype was HKD 8 million. The 25th percentile was HKD 4 million; the 75th percentile was HKD 15 million. A founder who asks an aunt to invest at a HKD 30 million pre-money valuation is creating a future mispricing problem. The script should anchor the valuation conversation to an external benchmark: “Based on comparable seed rounds in our sector, we are targeting a pre-money valuation of HKD 8 million, which implies a price per share of HKD X.” The use of “targeting” rather than “this is the valuation” leaves room for negotiation without creating a fixed expectation.

Instrument selection: convertible note vs. SAFE vs. equity. The Simple Agreement for Future Equity (SAFE), popularised by Y Combinator, has no direct statutory recognition under Hong Kong law. A SAFE is a contractual right to future equity, not a debt instrument. Under Hong Kong accounting standards (HKFRS 9), a SAFE may be classified as a financial liability or an equity instrument depending on its specific terms. The HKICS guidance note on early-stage instruments (HKICS GN-2024-03) recommends that Hong Kong founders use a convertible note rather than a SAFE for F&F rounds because the note’s debt character provides clearer legal rights for the investor and a more straightforward conversion mechanism. The script should state: “We are issuing a convertible note with a 20% discount and an 18-month maturity. This means your investment converts into shares at a price 20% lower than the next qualified financing round, and if no round occurs within 18 months, the note converts at a valuation cap of HKD 10 million.”

Cap table documentation and the Companies Registry. Every F&F round in Hong Kong must be recorded with the Companies Registry within 15 days of allotment (Companies Ordinance, Cap. 622, Section 135). The return of allotment (Form NSC1) must list the number of shares allotted, the class of shares, and the consideration received. For convertible notes, the note itself is not a share allotment, but the conversion event triggers the filing requirement. The script should include a timeline: “We will issue the note agreement within seven days of your transfer, and upon conversion, we will file the allotment with the Companies Registry and issue you a share certificate.” This level of specificity signals that the founder understands the compliance burden and will not leave the investor in documentation limbo.

The Scripts: Three Scenarios That Cover 90% of F&F Rounds

The following scripts are structured for the three most common scenarios in Hong Kong: the family investor who has never made a private company investment, the business-savvy friend who asks for valuation details immediately, and the high-net-worth individual who requires a professional investor exemption confirmation.

Scenario 1: The first-time family investor. This is the most common and the most legally sensitive. The conversation should be framed as an educational process, not a sales pitch. The script opens with a regulatory disclaimer: “Before I share any details, I need to tell you that this is a private investment opportunity. Under Hong Kong law, I can only offer this to you because you are a family member, and I am not making a public offer. If you are not comfortable with the risks of investing in a startup, please say no—there is no pressure.” This language directly references the Section 38D exemption and the “offer to the public” prohibition, creating a record that the founder understands the regulatory boundaries.

The script then provides a one-page investment summary that includes: the company name, the amount being raised (total round and minimum per investor), the instrument type (convertible note), the valuation cap, the discount rate, the maturity date, and the use of proceeds. The founder reads from the summary: “We are raising HKD 1.5 million in total, with a minimum investment of HKD 100,000. The instrument is a convertible note with a 20% discount and an 18-month maturity. The use of proceeds is product development and initial marketing. I have attached a copy of the term sheet and the subscription agreement.” The founder then pauses and asks: “Do you have any questions about the structure, or would you like time to review the documents with a lawyer?” The word “lawyer” is deliberate—it signals that the founder expects the investor to seek independent legal advice, which is a standard SFC expectation for private placements.

Scenario 2: The business-savvy friend. This investor will ask for the valuation cap, the dilution percentage, and the liquidation preference within the first 30 seconds. The script must provide precise numbers. The founder responds: “The pre-money valuation cap is HKD 10 million. At a HKD 100,000 investment, you will receive a convertible note that converts at a 20% discount to the next round price. If the next round is at a HKD 20 million pre-money valuation, your effective conversion price is HKD 8 million, giving you approximately 1.25% of the company on a post-money basis. There is no liquidation preference on the note—it converts to ordinary shares.” The specificity of “approximately 1.25%” rather than “a small percentage” signals that the founder has modelled the cap table. The founder should have a simple cap table prepared in a spreadsheet and be ready to share it on request.

The script then addresses the question of control: “The note does not carry voting rights. You will not have a board seat. Your rights are limited to conversion upon a qualified financing, change of control, or maturity. This is standard for a convertible instrument.” If the friend asks for a board seat, the founder should politely decline and explain that board seats for F&F investors create governance complications that later institutional investors will view negatively. The HKVCA 2024 Deal Terms Survey found that only 4% of seed-stage companies in Hong Kong granted board seats to F&F investors, and those companies had a 30% lower probability of closing a Series A within 24 months.

Scenario 3: The high-net-worth individual requiring professional investor exemption. This scenario applies when the investor has a portfolio exceeding HKD 8 million and requests to invest under the professional investor exemption. The script must include a verification step: “To confirm your eligibility under the SFO, I will need a certificate from your bank or broker verifying that your investment portfolio exceeds HKD 8 million. This is a standard requirement for professional investor exemptions and protects both of us from regulatory risk.” The founder should not accept a verbal confirmation. The SFC expects written verification, typically in the form of a letter from a licensed institution (SFC Licensing Handbook, Chapter 5, Section 5.2).

The script then proceeds to the investment terms, which for a professional investor can include more complex structures such as a side letter with information rights or a pro-rata participation right in future rounds. The founder says: “As a professional investor, we can offer you a side letter that gives you quarterly financial updates and a pro-rata right to participate in the next round up to your pro-rata percentage. These rights are not available to other F&F investors. The subscription agreement will reference this side letter.” The use of a side letter creates a tiered investor structure that is common in Hong Kong seed rounds but must be disclosed to later investors.

Regulatory Traps and the Post-Investment Relationship

The F&F round does not end when the funds hit the bank account. The ongoing relationship with F&F investors is governed by the Companies Ordinance and common law duties of a director. A founder who treats F&F investors as passive capital providers rather than as shareholders with statutory rights creates legal exposure.

The duty to provide information. Under Section 481 of the Companies Ordinance (Cap. 622), a shareholder has the right to request a copy of the company’s financial statements. F&F investors who hold convertible notes are not yet shareholders, but upon conversion, they become shareholders with full statutory information rights. A founder who ignores an F&F investor’s request for financial information after conversion is in breach of the Ordinance. The script should explicitly state: “After conversion, you will be a shareholder and will receive annual financial statements. If you have questions, I will answer them, but I cannot provide confidential information that would harm the company’s competitive position.”

The risk of insider dealing. An F&F investor who receives material non-public information about the company’s fundraising plans or product development and trades on that information—for example, by selling their shares to a third party—is committing insider dealing under Section 291 of the SFO. The founder must include a confidentiality clause in the subscription agreement that prohibits the investor from sharing or trading on non-public information. The script should say: “The subscription agreement includes a confidentiality clause. You cannot share the terms of this investment or any information you learn about the company with anyone else, and you cannot trade your shares based on inside information. This is standard and required by Hong Kong law.”

The exit path for F&F investors. F&F investors in Hong Kong typically have no liquidity until a qualified financing, a change of control, or an IPO. The founder must set this expectation clearly. The script states: “There is no secondary market for these shares. You will not be able to sell your shares until the company is acquired or goes public, which may take five to ten years. If you need liquidity before then, you can discuss a transfer with me, but I cannot guarantee that a buyer will exist.” The founder should not promise a buyback or a guaranteed return. The SFC’s Code on Unregulated Investment Schemes (2023) warns against representations that imply a guaranteed exit.

Actionable Takeaways

1. Structure every F&F ask around a convertible note with a valuation cap, a 15-25% discount, and an 18-24 month maturity, referencing the HKVCA/HKICS model term sheet (March 2024) as your default framework.
2. Open every conversation with a regulatory disclaimer that explicitly references the Section 38D exemption under the Companies Ordinance (Cap. 32) and confirms you are not making a public offer.
3. Prepare a one-page investment summary with precise numbers—valuation cap, discount rate, maturity date, use of proceeds—and read from it to maintain a professional, documented record.
4. Require written portfolio verification (a bank or broker letter) for any investor claiming professional investor status under the SFO, and reject verbal confirmations.
5. Include a confidentiality clause and a prohibition on insider dealing in every subscription agreement, and state in the script that no guaranteed exit path exists for at least five years.