Start-Up Fundraising: Use funds to pay myself back?
Hello everyone, I have taken a posting hiatus since shifting paths from IB to starting my own venture. I am now returning on the off-chance someone might have insight into an impending problem (and because I am not sure where else to go for this).
So to keep this short, I have been bootstrapping the business for say the last year (while organizing legally, with the site/app, etc.), but we have realized that to take the next step of growth into 2018 we need to raise money to significantly invest in marketing. Depending on how long we take to raise the money the total in will be somewhere $100k-$200k (let's say $150k). This is legal expenses, website/app development, design, marketing, and operational expenses. Everything short of paying me. We estimate the amount we would need to raise to be in the $200k-$300k range to cover our marketing estimates for the next 12-18 months. We need to narrow this down obviously but let's say we need $250k.
My question is, what is the typical practice for what funds raised are used for? Is it fair to go out saying we need to raise $400k with $150k of that going to repay the money that has been put in to date? Does the investor have a lot of control over what the money actually goes to (i.e. could we say we are raising $400k for marketing, etc. then repay the $150k plus $100k salaries plus $50k new office space for the year, etc. and really only put $50k into marketing?)
Not that this is something I would want to do, but it segways into my other question of what happens when a company raises, say a $5 million seed round? Obviously this goes to growth investments of marketing, etc. but in addition to that are the founders taking say $1 million for themselves (similar to a PE company doing a div recap)?
This got longer than I expected, but basically...if our company is raising money what are we allowed to do with it, generally? Specifically, is it fair to use a portion of that to repay myself and have my risk off the table going forward? Thanks in advance. Hope some might have some insights into this.
The investor will specify what the funds are to be used for.
Be careful with marketing expenses. They can become a black hole.
Isaiah, thanks for response. So they will outline uses of funds in the investment docs, I assume? There has to be wiggle room, though, I imagine. What happens if something unexpected comes up (lawsuit, manufacturing breakdown, etc.)? I can't imagine that the cash on hand can't be used for that...or would that require an amendment of some sort?
As for marketing, yes we are outlining a detailed plan with a marketing company. Waiting for some estimates back for a couple things, why the cost is such a range.
Yes, the shareholder's agreement will cover these things. Material capex and distributions will be reserved matters so you can't screw them over. You just need to be upfront and ask to sell a portion of secondary shares and/or negotiate for a salary to get back some money over time.
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