Fundraising: Can I Use Investor Money To Pay Me Back?

As I get questions from readers from my Ask The Chief ImpleMentor series, I will take some of the questions that I think might have a broad audience and post them here on the blog.

This one is filed under “Dragons – Fundraising: Can I Use Investor Money To Pay Me Back?”

Question:

Love the blog! Finally someone answering real life startup company questions! I want to raise $1.8 million from 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?

Thanks again!

Walt

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’t afford to let it fail.
• If you don’t get paid back, then the company only needs $1,550,000 instead of $1,800,000 to accomplish 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 assume, 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 is 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 have already fronted the payment for their incredibly worthwhile 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 disclose it in full and glorious detail in the PPM.
• Obviously, the bigger 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 strongly advising against it for the reasons that I just mentioned…but the client always gets the final vote. They did allow me to totally disclose 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 traction 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 pulled out more than $100,000. Ever.

Don’t count on being an exception.

All of this brings up another issue for those of you who are going to be seeking investor funds.

• You will only have one shot with most prospective investors. They are not shopping at Baskin Robbins – you can’t offer them 31 flavors of your deal.
• For example, like we were just discussing – how much, if any of your own seed capital should you try and get back in your offering?
• You might be tempted to give it a try…trying to get back all your money with the idea that you can negotiate if anyone brings up the issue.
• The problem is that you probably won’t have the chance…prospects will just tell you they are not interested…or even more likely, “It just doesn’t fit our criteria at this time….” Meaning you probably won’t often get a real voiced objection. Just another no. And no chance to have a discussion for renegotiation.

So, you pay your money…you take your chances…..but you want to do all you can to GREATLY increase your chances – so be sure and structure your investment offering right the first time!

What Do You Think?

Post your ideas if you have other thoughts.

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Robert Lee Goodman, MBA
Ceo & Chief ImpleMentor