Due to the nature of my work, I like to keep tabs on the investor community so I can stay informed about recent trends they are seeing. I was recently meeting with someone who works for a large angel syndicate in the area. As we were talking he mentioned something to me about investor expectations regarding how seed funds should be used.
Don’t Spend it on yourself
What do I mean by this? Well let’s go back to the meeting I had. While catching up, my contact was telling me something that he has seen over and over in pitches to the syndicate. At the pitch, the investors usually ask what their money will be used for. Smart answers are ones that state their money will be used for product development, marketing, etc. Not so smart answers are ones that include a portion of their money going toward founder salaries. My contact stated that when founders say a portion of investor money will go towards founder salaries, many of the investors lose interest.
Fair?
While it may seem unfair, if you think about it, it makes sense. The investors at the seed stage are taking a huge risk on you, your team, and your company. The odds of your business failing in the first few years are high, and the last thing these early investors want their money spent on is a salary for all founders. They want to see that money go into the business in order to give it a fighting chance. Afterall, that is why you are seeking their investment to begin with. Without their money, you would not be able to grow your business further.
Compensation due?
Now this is not to say that you and your co-founders shouldn’t be rewarded for all your hard work up to this point. You have committed countless sacrifices to get to where you are now. However, you would be better off with a majority, if not all, of the seed money going into product and business development. If you do feel the need to draw a salary from their investment to cover necessary bills (rent, etc.) please explain that to the investors, and don’t be greedy. Take the bare minimum to cover these bills. Finally, do not expect seed investors to be keen on letting you pay yourself a 6 figure salary with their money.
Takeaways
What should you take away from this insight? Seed funds should be used with the sole purpose of refining your product and gaining traction to attract Series A investors. If personal cash is tight and you need to pay the bills, be sure to explain that situation to the investors, and take only the bare minimum to cover such personal expenses. Otherwise you may find yourself without any seed money.