funding, venture-capital, seed, term-sheetCan founders pay themselves dividends right after funding, or are they typically prevented from doing so by the VC financing agreements?
No, you can’t - a dividend is a payout of company earnings to shareholders.
If a company makes profits in one year, then that money is added to the balance sheet as “retained earnings” and this is what can be used to pay dividends. If there are no earnings yet, there can’t be a payout of dividends.
You can pay yourself salary.
Assuming you are referring to a US C-corporation. Question: #1 after funding does equity exist in the company? #2 are the founders shareholders? #3 how is the VC funding, debt or equity or both? #4 what is the legal minimum capital where the company is organized? #5 will the VC terms allow a dividend without their approval? #6 is there a law against such a distribution (more than likely not)?
If the answers are #1 yes; #2 yes; #3 they have equity; #4 the amount remaining is greater than the minimum; #5 it is allowed and #6 no; you legally can make a distribution as long as all shareholders participate according to their rights. Such a distribution would be termed a return of capital dividend (technically there are no earnings and profits in the company). Such a distribution/dividend is non-taxable to extent the money received is less than the equity money invested (technically the outside basis in equity is greater than the distribution). Any excess is taxable at short-term capital gains rates as long as it is not disguised compensation. In which case the entire distribution is treated as compensation and taxed as such. The chances a VC will agree to it are minimal. However, if the distribution passes all the restrictions then it is possible.
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