How Can I (Legally) Support Myself With Funds Raised for an Early-Stage Startup? An aspiring entrepreneur asks whether it's legal to take a salary from investor capital. Ask Entrepreneur's business expert answers, also suggesting crucial factors to consider before leaving a job and salary behind for any startup.
By Ryan Himmel Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
I have a great idea for an educational/political website. In order to bring this idea to fruition, I would need to quit my job and dedicate 100% of my time and energy towards raising money and working on the website. As I think it will be a huge success, I'm ready to quit my job and dive in with one major concern. Is there any sort of protocol, law or ethical directive in how funds I raise are used? In order to stay afloat with no other income, I would need to take a salary from the money I raise. If this isn't legal or ethical, how would I handle my personal financial needs along with those of the project?
It's certainly legal to pay yourself a salary with some of the capital you raise from investors. As far as your ethical concern goes, it largely depends on your agreement with investors and the amount that you need to support yourself. From my personal experience and consulting with other entrepreneurs, I would advise you to first think through the decision to leave your job immediately. Here's why.
Most investors will want to invest in a new business that has some traction or at least has an experienced management team. While you may have a great idea, it's only part of what it takes to launch a successful company and raise capital. The other more important components that investors focus on include the management team, market opportunity and the ability to cost-effectively execute on the concept. To that last point, most early investors aren't going to fund a venture and pay a low six digit or even five digit salary; they opt for founders to earn it through sweat equity.
Let's suppose you still want to leave your job even when it takes at least three to nine months to raise capital. It’s highly unlikely that you will be able to support yourself with the income generated by your business. Rather, I would recommend that you try to start the educational/political website while you are currently employed. I understand that you may have difficulty managing your time and will need to keep somewhat of a low profile so your employer does not find out. However, you need to test the market first.
The last reason not to leave your job yet is due to the fact that it doesn't appear as though you have experience running a new company or the personal capital to absorb the problems. You are going to make many mistakes and that's part of the learning process. However, it's too financially risky to cut yourself off from your current source of income when you are starting a new business in an unknown territory. Furthermore, I would recommend that you start to focus on finding partners that have experience in the industry and are excited about your concept.
I certainly still support the idea of trying to launch the business. However, you need to make sure you are prepared to increase its chances for success. You don’t want to become one of the many businesses that fail before they even get started.
