Can startup funding cover founder's personal expenses?
I and a friend of mine are working on our own web startup. Right now we are coding the whole thing and would be looking for investors 3-4 months down the line. My question is, can we include our own personal expenses in the funding requirement that I ask from angel/VCs?
We are both fresh grads; he is about to complete his undergrad in CS and I am about to complete my MBA (have no prior work ex). So we have no savings to dig into and I have a huge education loan to pay back. Which is why we are both taking up jobs for the time being and would work on the side on the startup and quit our jobs once we get funding, which can only happen once our startup gets some traction.
So whatever funding our startup gets must cover our living expenses (and my loan expenses).
So my question is, would a VC/angel agree to that? And how do I present it to a VC/angel?
Funding Founders Personal Expenses
-
I'd say the opposite. If you are not taking out any salary, then all your personal expenses are in a moral (but not accounting) sense equity in the company and should be regarded as such when negotiating with the VC. – User239558 12 years ago
4 Answers
Another way of dealing with this, might be, to present 90% of what you have achieved up to now. Part of the money that you will ask will be for improving the code, upgrading the program, r&d etc. part of this money can go to your back payments.
I think a few might, but most probably aren't going to be very interested in it. When someone invests in a company, they're typically looking to invest in the future of the company, not its past or the past of the founders. They aren't wanting to pay off your student loan debts or the debts that you've accumulated while building the startup.
In fact, all of that unpaid time and the money you've spent educating yourself (student loan debts, etc.) is what justifies you having equity in the company in the first place. It would seem to me that if you're hoping for an investor to pay off your personal expenses, it turns it into a situation where the investor is paying you like an employee. And employees don't get equity. Or at least, not much. That early, unpaid effort on your part is what justifies your share of the equity. If you really want to go that route, I'd suggest you make it very obvious to any investors (in verbal discussions, on balance sheets, or wherever it makes sense) that you intend on having a chunk of their money go to back payments like this. You don't want to surprise them with that kind of information.
To be clear, funding you get from investors might be able to go to salaries, from the time of investment on. But in most cases, it won't go to pay you back for all of the hours you've put in so far, and even more so, for student loans. That's a personal liability, which shouldn't belong to the company.
-
Agreed and that is why I wanted some expert opinion. For the time being, both of us (the founders) would be working to support this venture in our free time and will also help me to pay off a good portion of my loan. But once I quit my jobs and start full time on the startup, the salary I would be drawing would have to cover my living expenses (which sadly includes my loan). I am taking up a job and would be starting paying off my loan immediately but once I quit that job I would need money to survive until the startup starts generating enough revenues – Sandip Dev 13 years ago
-
Don't treat these as back payments, they are simply a reasonable on-going salary for the founders. It's not the VC's business what you do with your salary, if you pay back old loans or buy a house. – Alain Raynaud 13 years ago
-
Good point, Alain, if you're paid a salary, starting from the time you get funding, you are allowed to pay off older debts with it, just like any other salary from any other job. It's just a much tougher sell when you tell investors "I want you to pay off my student loans, all up front, when you buy into my business." – rbwhitaker 13 years ago
-
@AlainRaynaud Yeah. All i need is to pay a few installments of my loan until the business becomes profitable enough for me to take a decent salary out of the revenues. I don't at all intend to pay off the entire amount of the loan from VC funding, just a few monthly installments. – Sandip Dev 13 years ago
-
@rbwhitaker I talked to the bank about it and asked them if they could grant me a reprive for say 6 months to a year on the loan. But they wont, if I miss 2 consecutive payments my loan would be declared an NPA and the rate would start increasing. – Sandip Dev 13 years ago
It's normal for a company, post-funding, to pay a half-decent salary to its founders.
Frankly, your main problem is that you have a 1% chance of raising VC funding. Your problem is not whether the VC money can be used for your own expenses.
-
Yes, that is a huge problem. I was initially a little naive in thinking that our academic pedigree and CV would easily get us funding. That notion has long gone. It sure helped us in getting some attention from angels but they want a prototype and want us to show some traction before committing money. – Sandip Dev 13 years ago
So my question is, would a VC/angel agree to that?Yes. It happens sometimes.
And how do I present it to a VC/angel?Include your living expenses clearly in your financial forecasts.
You should be aware this will make your position more difficult. VCs will be much more likely to invest in companies where the founders have invested their own capitol too. It shows commitment. Try and bootstrap as much as possible before asking for funding. If you can show some real customers you will have more of a chance of getting funding.
-
Yes I am aware this makes possibility of funding even harder. There fore we have decided to launch the site now and try and get users and once we have enough user traction investors would be more willing to open their purse strings. Until then I will have my job to sustain myself, drive the startup and pay off the loan. – Sandip Dev 13 years ago
