Why You Shouldn’t Take A Payout From Your Series A Funding?
Imagine this scene.
It’s your first board meeting after closing your $10M Series A round. You update the board comprised of you, your cofounder, your attorney, and your two investors on your progress.
Then you excuse your cofounder for the closed session of the board meeting where you review your financials. You go through your balance sheet, your income statement, and you get to your cash flow statement.
“Why is cash down by $2.3M?” One of your investors asks you.
“Oh, that’s because my cofounder and I each took a $1M payout,” you say.
The room grows eerily quiet.
The sound you hear is the sound of the end of you as CEO and the end of your company.
“Why would you do that,” the investor asks. He is trying to hold back his anger.
“We felt we deserved it.”
“Okay, here’s what’s going to happen. I want you and your attorney to leave the meeting. I need to speak with the other investors for a minute.”
You leave the meeting and go to your office which happens to be next door to the board room. You can hear the other investors talking, and they sound pissed.
After 15 minutes you and your attorney are summoned back into the board room.
The investor looks at you and says, “You are terminated as CEO and your cofounder is terminated as well.
“You need to immediately pay back the $2M you stole from the company or we will have no choice but to sue you for the money. I’ll give you 24 hours to wire us the money.”
Your investors are expecting you to use the funds to run the company, not to line your pockets.
I’m not saying you shouldn’t pay yourself a salary. That’s different. You should pay yourself a salary. However, taking a payout after you raise your Series A is not acceptable under any circumstances.
You can likely cash out some of your equity in a future round. There is a provision in your equity agreement that probably covers this.
The existing investors will have the first chance to buy the equity. And it’s likely that it will sell at a discount to the upcoming valuation.
Get the idea of a payout out of your head.
You will immediately lose the trust of your investors if you take a payout, and you will likely be fired and have to pay back the money. That’s the best case scenario.
The worst case scenario is legal jeopardy that you don’t want.
For more, read: Is Giving Schwag To Your Employees A Bad Idea?