The investment he has put in to the company has gone in to his directors loan to be paid back to him through the company but he also requested he was paid the same wages as me and my business partner from his first day of investment.
Is this normal? He’s basically getting 30% of the company for nothing although I do understand he has risked his own money in this venture.
Selling equity is a transaction where the company gets money and the investor gets equity. After this transaction the money belongs to the company, and as a directory of the company you have a duty to act in the company's interests. You exchange money for equity and then you're square. You don't owe the investor anything.
Giving the company's money away makes no sense. You don't give people a salary if they don't do work (depending on your jurisdiction this might even be illegal), and you don't agree to a loan when you don't owe the other party anything.
If there is a loan involved the investor has to give all his equity back when the loan is repaid. Come on, don't be a sucker.
The full story isn't here so I'm reading in between the lines. Here are a few scenarios.
1. The investor is not experienced. He has no idea that what he is doing is burning his own money while burning others as well. His investment being paid back to him is taxable income, when the initial investment was post tax. This practice also makes his investment worthless because other investors won't invest in it due to this shady practice. You need to tell him that this is not in his interest. He is doing this out of fear of loss and in an attempt to reduce risk while inadvertently multiplying his risk and guaranteeing loss.
2. The investor is attempting to force you to take a lower salary. As low as possible. By doing so, he is ensuring that the investment lasts as long as possible by keeping everyone involved as lean as possible. This still suffers from all of the points above (see 1) although this point is indicative of uncomfortable feelings on both sides preventing an open conversation from happening.
It help to be as transparent as possible. It keeps everyone accountable and makes these types of conversations easier to navigate.
My investor has done exactly the same. He started investing in the company a bit at a time then a few months down the line insisted he was paid wages from the time we were. He does do work but nothing was agreed at the time. His wages go into his directors Loan account and our wages (there is two of us) go in to ours as a negative? We needed this investment so had to go for it but then he started changing the goal posts. Is this normal or legal ? If I had some evidence to take to him I would confront him with it because two and a half years later we still owe him almost half of his investment but he’s been paid a wage during that time. His investment was also for 30% of the company.
Not normal. Its a big red flag.
When an investor puts money, they get equity on return for it. i.e they buy your shares . eg 100,000 shares for 10 each if they invest 1 million. Thats it they dont get anything else.
By putting this money as a loan you have basically given him equity for free.
Also, unless he is working 40 hours a week for your startup, he doesnt deserve to any wages.
Sort this out before it gets worse.
May 10, 2019 at 5:50 am
The full story isn’t here so I’m reading in between the lines. Here are a few scenarios.
The investor is not experienced. He has no idea that what he is doing is burning his own money while burning others as well. His investment being paid back to him is taxable income, when the initial investment was post tax. This practice also makes his investment worthless because other investors won’t invest in it due to this shady practice. You need to tell him that this is not in his interest. He is doing this out of fear of loss and in an attempt to reduce risk while inadvertently multiplying his risk and guaranteeing loss.
The investor is attempting to force you to take a lower salary. As low as possible. By doing so, he is ensuring that the investment lasts as long as possible by keeping everyone involved as lean as possible. This still suffers from all of the points above (see 1) although this point is indicative of uncomfortable feelings on both sides preventing an open conversation from happening.
It help to be as transparent as possible. It keeps everyone accountable and makes these types of conversations easier to navigate
(Meant this post to be a reply to the original post, rather than to a comment)
This “investor” is 100% amateur hour. Keep this person away at all costs!
My investor has done exactly the same. He started investing in the company a bit at a time then a few months down the line insisted he was paid wages from the time we were. He does do work but nothing was agreed at the time. His wages go into his directors Loan account and our wages (there is two of us) go in to ours as a negative? We needed this investment so had to go for it but then he started changing the goal posts. Is this normal or legal ? If I had some evidence to take to him I would confront him with it because two and a half years later we still owe him almost half of his investment but he's been paid a wage during that time. His investment was also for 30% of the company.