Investors Pay for Your Future, Not Your Past.
It’s time to incorporate your new startup. All the dreams and limitless possibilities lay in front of you! It’s all rainbows, butterflies and unicorns!
So what do you need to know about approaching investors in this state of optimism and euphoria?
Investors are investing in your future not your past
You see every little thing that it’s taken to you to get to this point. As much as that is part of your story, you need to get away from the details, summarize and start talking about your future. Here’s what I mean:
- Your bother-in-law was your co-founder, it didn’t work out and he’s no longer with you.
- You had a contract with a vendor to build your technology, you still owe them some cash.
Get all of that stuff cleaned up before you bring it into the incorporation. These problems, don’t go away, so go attack them like your future depends on it, because it does. Don’t be naive.
If you’ve already incorporated – get them cleaned up anyway. If your company is a success, all of those things are going to come back at you and they will be more expensive than ever.
In addition to your Article of Incorporation, you’ll want to have an Operating Agreement as part of your incorporation – get it in place now. It’s worth paying the attorney for help or downloading any number of the free forms. Trust me, in the euphoria stage you see everything in the future of the company working out “Amazing.” An Operating Agreement dictates how the partner/members will operate. For example, if your well intentioned partner decides to leave six months into the new venture, what happens to her/his stock? Do they get to keep it, do they have to sell it? What’s the price and mechanics?
What about all the time and money that you’ve already put into the company? That is called your contribution to the company. It’s used as the basis to calculate the price of the shares that you are granting yourself at incorporation.
“But Dave, you don’t understand, I need to get paid back for that money, and want to get paid for my time!” No, I totally understand… and you’re not going to get it paid back. This is where the headline comes in, Investors will pay for your future, but not your past. Investors don’t want their money coming in to pay off debt – even if the debt is to the founder. They want it to grow the company and increase their odds of creating a return on investment – that is why they are investing.
Now, it’s important that you account for your actual cash in the company. That is tactically going to go onto your balance sheet in Quickbooks or similar accounting package as Shareholder Equity, before Incorporation. Or after incorporation, it will go on as a Shareholder loan. But when a new investor comes into the round, they are going to want you to convert that loan into stock at the price per share that they are investing in the company.
Sorry to kill a unicorn… but you still have butterflies!