equity, investment, funding, venture-capitalWhen a company goes through a round of funding, are there terms set on what they can spend that money on?
For example, if a company gets 10 million for 10% equity, can the company owner then use 200k of that to buy himself a shiny new Ferrari? Naturally, I understand that the main reason for getting funding is to get money to expand your company, but are you legally bound to spend every penny on the company or is it up to you what you spend it on? I mean, you’re technically just selling a piece of your company, so why shouldn’t it be up to you?
The company got the funding not you. If the IRS does not view it as a legitimate business expense then it is not. An investor may place additional restrictions on the money. If you issue yourself a big (or small) bonus then get ready to deal with VC and they are viscous.
You can spend it on what you want, but you will be evaluated based on what you spend it on. Build the business first, the ferrari will come later, and it will be your money that you buy it with (generated as a result of the business that was built by the investment). Edited.
I agree with @MichaelDoran’s answer.
I will also add that investors often want assurances it won’t be spent on CEO salary, for example.
Edit:
The part where the OP is wrong is where he writes “buy himself a shiny new Ferrari.” If company money is used to buy a Ferrari, the Ferrari would not belong to the CEO but, rather, to the company. I think the OP took a shortcut to writing “bonusing the CEO enough money to buy a new Ferrari.”
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