Moving Cash Into & Out of Your Bootstrapped Startup

Written by Sean Murphy. Posted in 2 Open for Business Stage, Rules of Thumb, skmurphy

  1. Don’t make an equity investment in your startup so that you can pay yourself a salary. Put enough money in to cover expenses in advance of revenue. Live off of savings.
    Why:  making an equity investment that you take back out as salary means that you are paying taxes for the roundtrip.  The combination of Federal, state, and local taxes will cut your runway by 20-30%.
  2. If the company needs more money to cover expenses in advance of revenue then make a loan to the company at a realistic interest rate.
    Why: if you choose to pay the expenses out of pocket they may not be deductible, if you buy additional stock in the company it is difficult to get the cash back out without paying taxes on it, either as dividends, salary, or bonus. The loan can be repaid and the only taxable component is the interest.
  3. Run consulting dollars through your new firm not your old one.
    Why: this revenue can be used to offset costs and extend your runway. This also enables you to get on the approved vendor list for a firm you may later want to sell  a product to.
  4. Don’t have one founder take a salary if both or all don’t get one.
    Why: this inevitably causes a disconnect in motivation for both parties.
  5. Have one founder write each check and another sign it.
    Why: do this from the beginning so that you minimize the risk of misunderstandings and have a simple review and approval process for expenses.

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Comments (2)

  • Mike Rowehl

    |

    Awesome set of practical advice. Great post Sean!

    Reply

  • nora

    |

    thank you clear obvious in hind sight yes

    Reply

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