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Friday, November 02, 2007

Looking after yourself as a founder

When to Take the Money Off the Table
In Vegas, if you keep on winning, you can keep on playing all night. But if you lose it all just once, you're done for good. The only way to ever get ahead in the long term, is to take some money off the table when you're lucky enough to have it.
Pouring money back into your startup is a lot like betting at Vegas. Ideally if you keep winning you'll be able to keep pouring money back into more growth, and more profits. But if you lose just once and have already invested all the capital you had on reserve, you're done for.
Startup founders need to learn the value of taking money off the table when it's available. Without knowing when it's time to write yourself a check, you may end up creating a payday for everyone else while putting yourself in jeopardy in the process.
(Re)Filling your Coffers
When you started the company you probably had some money saved up or some capital reserves to fall back on. That could have been anything from your home equity line of credit to your personal savings account. They gave you a little bit of latitude to operate before your new venture involved a regular paycheck.Over time, those capital reserves got sucked into the business, totally depleting your personal reserves. That seemed okay, because the business was growing and clearly you were getting a return on your investment.But it's easy to forget how important those savings were to begin with. The cash in your coffers allowed you to navigate a difficult period in your life. To think that there won't be another slow period again could be a huge mistake! Don't think of pulling money out of the business to refill your capital reserves as a selfish act. You may need to rely on those reserves during a downturn, so that you can spend time focusing on fixing the business without having to worry about whether you'll go personally bankrupt at the same time.
Thanks for the Memories
The sooner you can take that money out and refill your coffers the better.
Over time, as more investors, shareholders and partners join the business, your initial capital contributions, while incredibly risky investments at the time, will quickly be forgotten about. A Founder's early investment is often written off as the cost of doing business or the cost of owning the majority share by later stage participants.You too may even consider that money as a sunk cost that can't be returned. But the reality is that nest egg that got you here should be replenished quickly, before it's forgotten about and before anyone (including you!) loses sight of its valuable contribution. A simple way to do this is to treat your contribution the way investors treat preferred stock. Many venture capitalists or angel investors will ensure that any income that the company receives in the future will go toward paying off their investments before anyone else's.For this reason you should agree that at least a certain percentage of your initials profits will be used to repay the original debt that you created when you invested in the company. The company should show a clear and distinct liability to anyone who's invested in the company, on a preferred basis, including you.

Healthy Founder, Healthy Company
Refilling your coffers not only helps you financially, it helps the company as well.
It's hard to manage a struggling company with a clear head when the Founder has to worry about making his home mortgage payment at the end of the month. The distraction of personal finances can force the Founder to make bad short term decisions on the company's behalf in order to settle his own debts and problems. Generally speaking, if the Founder is failing at a personal level financially, the company is soon to follow. Therefore in order to maintain a clear focus on how to keep the company on track, even in the most trying of times, it's important to focus on how to keep yourself on track.

The Captain Needs a Life Vest
If the ship looks like it's going down, your employees will get other jobs and get their finances in order quickly. You, on the other hand, don't have the luxury. You're going to be forced to go down with the ship, as all of your personal assets are likely intertwined with the company's.
For this reason, think of taking money off the table as your “corporate life vest” that ensures that if you do go down with the ship, you don’t get sunk altogether.
Taking money off the table as the company grows isn't about being some greedy industrialist, it's about being a smart player that understands the value of having personal reserves to manage effectively in a business crisis.
by GB Network
Slainte Gordon

1 comment:

Business Marketing said...

Great article, lots of useful info here.