A diamond wouldn't be a diamond without all the pressure on it...Part of it is that I'm still just starting out on this little Mandolin thing. (Ok, been playing it for two years now, but still feel like a novice.) So, there's this real desire to sound better than I am up there!
One of, if not THE best course I took during my tour in college was a sightreading class. It was a 400 level class only available to juniors and seniors, so all of the folks that thought they wanted to be a music major had been weeded out long ago. We all thought we would be playing our main insturment, but the professor had different plans. The first day of class, she announced that the learning portion of the class would be 35 minutes, with the last 10 minutes reserved for 'enlightenment'. Didn't have a clue what that meant until she pulled out a hat, put everyones name in it and had someone draw from the hat. The person selected had to stand in front of the class and sing the song provided. The class was 'sightreading', so obviously we had never seen the music before - it was always some obscure Italian piece no one had ever heard of. The instructions were simple - "sing at the top of your lunch and screw it up the best you can while we all laugh at you". The problem was that only 1 person in the class was actually a voice major - we weren't singers! Scared the crap out of me the first day, but by the end of the semester, everyone WANTED to be the person up there. We learned really fast that making a total ass of yourself can be a lot of fun, relieves stress, and builds character. And, it had a nice sideaffect - I don't get nervous when I get up in front of an audience, whether it's 2 or 2,000 people. I learned that it's OK to screw up, and that folks weren't judging me nearly as much as I thought they were.
My suggestion would be to have an 'open mic night' with your friends. Let them know that everyone will have to get up and play, and that the goal is to "screw it up the best you can". The sessions quickly turn into a support group - a lot of trust and respect is built, and you become a much better musician.
Sounds crazy, but it works. I think that sightreading class taught me more about life than any other class I ever took at any level. Give it a try and have some fun with it... if nothing else, the laughter will do you some good.