Personal v. Business Expenses?

Many startup owners, in the early days as the sole owner, may feel tempted to run “sort of” personal expenses through their corporation on the theory that they have no other owners to harm.

Of course that poses legal issues – those expenditures are generally not valid tax deductions, and most likely constitute dividends to themselves as owners.  But it also presents an appearance issue for potential investors.  Those persons want to evaluate the profitability of the business.  If your company’s bottom line reflects non-business expenditures, investors must “erase” personal expenses from your company’s financial information to get an accurate picture of the underlying business.  They want to invest in a business that gets operated as a business, and personal expenditures call that focus into question.  They also want a forthright business partner, because as much as investors invest in the company, they invest in the founder.

In my experience, founders who avoid running personal experiences through their startup benefit in the long run by appearing as straightforward, ethical partners focused on the business itself.

And if your business doesn’t need outside money, you can substitute “acquiror” or “strategic partner” or even “employee” for investor – because those persons ask themselves the same questions when they invest their money, operations, or time in your company.

Dealing with “Dead Equity”

“Dead equity” refers to company stock owned by individuals and entities no longer contributing to the company. In general, there are two types of dead equity seen on emerging company cap tables: Departed founders/employees. A co-founder or early employee leaves a company or no longer significantly contributes […]