How Much $ Can I Take Off The Table

Imagine I came to you and said,

Hey, invest $3,000,000 in my company…

…but only $2,400,000 goes to grow the company - $600K goes to me right off the bat.

Selling your own shares in the context of an investment into your company is called “taking money off the table” - and it’s not always OK.

One investor once told me point-blank:

I’m doing this deal to grow the company, not to line the other shareholders’ pockets.

And I’ve spoken with countless founders who don’t know how to approach this conversation with investors, or even what’s acceptable.

The stakes are high, because if you approach this wrong they might think you’re not dedicated & you could blow the deal.

But if you don’t have the conversation, you might be living on ramen noodles permanently.

We won’t even talk about the things founders do when their person bank account is overdrawn, but the company’s balance says $1,500,000.

But not you, because today we’re going to hit taking money off the table, step-by-step.

First off…

Step 1: Make sure you’re paying yourself properly

Proper salary is a big mitigating factor:

No investor wants their founder worried about how they’re going to make ends meet every month.

They want you to be paid enough that you’re 110% focused on growing the business.

So if it means putting in an extra $200K, no one’s going to dispute - just don’t go crazy on salary.

Here’s what a startup CEO typically earns by stage:

Assuming your salary’s right, next you’ve got some explaining to do…

Step 2: Explain why you need the money

Yes, when you’re putting your heart, soul & money into your company for years, at a certain point you need to see something out of it, right?

But in most cases, that “something” comes out of profits.

If you want it from investors, you’ll need to plead your case.

Sometimes you just need the money you’ve already invested into the company, for a specific expense: e.g. wedding, house down payment

Be transparent and don’t make it a big thing.

In any case…

Step 3: Be ready to negotiate, and don’t go overboard

Rule of thumb:

• 5% of a round (i.e. $50K on $1M round) is generally OK, but 10% pushing it.
• Anything north of 10%, expect significant pushback.

It’ll be a discussion no matter what.

Remain reasonable, logical and graceful at all times.

The more aggressive you try to be, the more they might try to change valuation terms (rightfully so) or even pull out the deal.

Because think about it from their perspective:

This founder needs to sell some of their own equity stake. I end up with a larger ownership share of the company, but am I now thinking differently about the founder’s level of dedication going forward and/or responsibility?

Try to keep cash-out to a minimum

If you’ve invested $0 and have been drawing market-rate salary for two years, you better have a good reason to take money off the table.

But if you have continually invested cash in your company, I hope you invested it on a note (consult a tax expert) because repaying a portion “feels” better than selling equity on a secondary.

The less you can afford to take off the table now, the better your valuation will be later if/when you do sell.

See you next week!

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