Funding – Can I Use Investor Money to Pay Me Back My Start Up Costs?

Question:

I want to raise $ 1.8 million from angel investors for my computer business to take it to the next level. Can I use $ 250,000 of the $ 1.8 million to pay me back the money that I have already invested in getting my company started?

Answer:

This is one of the most frequent questions I get from clients: Can I get back all of my money that I have invested so far in starting my company from the new investment dollars I get from angel investors or venture capital?

The short answer is almost never.

  • Most will see it as a red flag and not invest.
  • Most want to see you so committed, financially, to the company that you can not afford to let it fail.
  • If you do not get paid back, then the company only needs $ 1,550,000 instead of $ 1,800,000 to achieve the same goals that are in your business plan.

The longer answer is maybe a little.

  • Sometimes … not often … but sometimes … you might be able to pay yourself back some … or have the company assum, say a working capital loan you took out … or assume responsibility for a second mortgage on your house where you can document that all the funds went into the company.
  • The other way that sometimes works with direct payments to others that you've made. For example, say you hire that great consulting firm, Ceo Resource, to help your start up consulting, business plan and PPM prep work. Let's say, you have already paid them $ 10,000. What you might do is list Ceo Resource as a start up expense in the start up expenses table even though you already already fronted the payment for their incredibly worth fees. In this case, you turn in the receipt after the funding like an expense report … you have accounted for the expense on the start up costs table … so the numbers balance. However … if you are going to do this … be sure and distinguish it in full and glorious detail in the PPM.
  • Obviously, the larger the amount you want back to you, the more resistance from prospective investors.
  • There are always exceptions … a client in Chicago insisted their board members, who were their first round investors, get back $ 1 million in start up funding of the $ 2 million they had invested. I jumped up and down consistently advising against it for the reasons that I just mentioned, but the client always gets the final vote. They did allow me to totally distribute the payback in the PPM I did for them.

So, what happened? They sold the whole $ 5 million deal out to the first investment group who saw the deal … and the board members got their $ 1 million. The company had such good transaction on a product that was already in the marketplace that the investment group agreed to the terms. So, even with all of my experience, I can be wrong. However … it is the only time that any client in 30 years has ever dropped out more than $ 100,000. Ever.

Do not count on being an exception.

Source by Robert Lee Goodman

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