fundingIf I’m the founding CEO of a startup and I receive $1 million in funding, can I keep a large portion of it to pay myself (e.g. $500,000) and use the rest to invest in the company strategically?
The reason I ask this is because I want to be an entrepreneur and I’m wondering how much freedom I get with funding if I go the investor route (as opposed to the self funded route).
It depends. But most likely, no. And, unless you are a criminal or possess extremely poor judgment, it’s a very bad idea to do that even if you could technically get away with it.
It depends on the deal you have with the investors and the amount of control you retain.
Professional investors are savvy enough to prevent this kind of thing from happening. It is extremely counterproductive to their interests and part of the vetting process is to weed out character flawed individuals who would do something like this in the first place. Many people have remarked that one of Warren Buffet’s core strengths is the ability to discern the character of the people in whom he invests Berkshire Hathaway’s capital and identify the one’s likely to change their behavior after receiving funding.
Many investors retain control via board positions, etc. and could promptly remove a CEO who behaved contrary to company interests. And clawback provisions in the shareholders agreements could allow them to recover any funds misappropriated the way you describe.
However, if you are dealing with unsavvy investors, it is possible they might not know enough or think far enough ahead or simply be too inexperienced to know how to prevent such behavior. In that case, you might be able to get away with it. But it is likely to be the last time you will ever receive funding. And it could likely cause a lot of lawsuits and tank the company in the process.
The alternative to this path is to use the money wisely to grow the business and, instead of $500,000, turn the value of your equity into many multiples of that.
You could do this with a crowd funded project, it’s likely already been done - projects like this will fail to deliver what they promise. Anyone investing in a startup will expect a clear justification of the funding to total, and also make fairly strong proof of performance points. If you don’t meet those metrics, you may find they own your idea. TL;DR, no, you can’t.
Maybe. In depends on what type of “funding” you receive.
If you receive $1M from investors, then your investors expect a certain return on their money, and you taking their money home with you is not in their best interest. If in the future you are able to provide a decent return to the investors, either in the form of dividends or increased stock price, and there is money left over for you to take home, then you probably can set your salary moderately high without too much pushback. But the real gains come when you are able to cash out some of your stock.
If you receive $1M from crowd-funding such as Kickstarter, the people who are funding your project are not investors, and so they do not have a true vested interest in the success of your company; only that you fulfill your promises. This typically involves providing them a product of some sort, and in most cases there wouldn’t be enough profit to be able to take home $500K and still fulfill the products. But there are some cases where this is possible. If for example you are creating software and it costs you $250K to complete it, but you raise $1M, since it doesn’t cost very much to distribute software, most of that profit is yours. Effectively, in this case, you have just gotten a lot of presales customers prior to product release, which is entirely different than investors that own a piece of the business.
No.
If you get $1,000,000 from investors then you need to focus on two things:
As you can see, if you invest $1,000,000 in a company and you only see $1,000 after one year then you picked the wrong CEO because you only have a return on your investment of 1%
If you invest $1,000,000 buying a few AT&T shares for about $40 each then you get almost $50,000 each year in dividends.
If you are an AT&T shareholder then you don’t need to deal with employees, CEOs, leasing offices, building a product and sell it.
If a millionaire is investing $1,000,000 in you then you should make an effort and try at least to make more money than AT%T or at least $60,000 each year.
I am using AT&T only as an example.
Other publicly traded companies may offer shareholders higher returns for their investments paying more cents per share each year in dividends.
If you cannot turn a profit then maybe you are not the right CEO for the company and you will simply get fired in a year.
How long do you think your $500,000 are going to last?
You can barely buy a house with that kind of cash.
It’s best to keep your job as CEO for the next 20 years and get a modest salary of $50,000 and eventually make $1,000,000
Do you want $500,000 now or do you want $50,000 each year for the rest of your life?
Choose wisely.
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