> By the way, it is vital to remember that the money you raise IS NOT your money.
But it isn't the investors money either. It is yours to allocate as you see fit but keep in mind that you should always do it to benefit the company and the shareholders.
Beware of backseat driving shareholders or suppliers of convertible notes and other instruments of lending that then want to tell you how to spend their investment/loan (or even with whom), and never agree to spend all or part of an investment with a company allied with one of your investors. You are in charge, you decide.
And beyond that, keep a good eye on your shareholders agreement which could very well place limits on the kind of things you can do with the money you raise, many of those have clauses which can severely constrain your ability to run your business such as being forbidden to move the company (even just to larger offices), hiring of C-level execs and other bits like that. So make sure you fully realize the consequences of entering into a shareholders agreement and do not fold too easily on 'standard clauses' that you feel will cramp your ability to run the company as you see fit.
Actually, they literally do have a moral and fiduciary duty to their investors to spend money wisely. The article describes it well.
I'm not a lawyer, but that's what I've been advised. You must adhere to good judgement when spending the company's money or people can and will come after you on a civil or criminal level.
That's a pretty broad scope, and corporate hot tubs are probably not beyond the pale, but you can't take investor's money and put it into your bank account and say "Sorry the company has folded". Embezzlement and fraud are real crimes that you can get real convictions for, and investors can file civil suit for much less than full on embezzlement - witness Benchmark's suit against Kalanick/Uber.
You don't have to spend it wisely, just not deliberately unwisely (e.g. put it in your own account), and I believe the 'deliberate' is much more important there than 'unwisely'.
As long as you can make it sound kind of reasonable that your corporate hot-tub would have attracted the right talent, it doesn't sound nearly unreasonable.
Exactly. The things I've seen as far as blowing investor money is cringe worthy. But almost never have I seen a successful lawsuit by investors except I. The case of outright theft or fraud.
Even without a moral obligation, there's a pragmatic reason to spend money wisely: if you blow the money on frivolous creature comforts, you end up in the same state you were in before the startup (which usually means poor), except that nobody will invest in you again. This seems like an objectively worse position to be in.
The real winners when startups blow all their runway on fancy perks are purveyors of luxury goods. That's where all the money goes, after all.
I've seen start-ups that blew all their money in ridiculous ways - to me - without ever crossing that line. You can burn a lot of $ once you start shopping in SF for hip office space, create an irresponsible marketing budget and hire some expensive VP's of something or other. And VCs will applaud you all - or at least most - of the way when you do that.
I see venture capital in the United States exactly the way I see record companies: for the most part they try to get the noob's signature on the dotted line on a contract they will wish they never signed a few years later on the off chance that they too will end up like a few of the mega stars did.
i think the idea is that it's not your money, but the companies money. Like, it's not meant for you to spend on a new car or something.
The next line, "You have a fiduciary and ethical/moral duty to spend the money only to improve the prospects of your company." seems to agree with this perspective.
I've seen companies buy a company Mercedes-Benz or BMW just to convince their clients that they have a good product. Some even buy a house with company money, justifying that they use it to pay themselves lower salaries and lower the tax they have to pay.
Both of those would get you in hot water with the IRS. And I wouldn't rule out the possibility that an investor would succeed in a lawsuit alleging breach of fiduciary duty.
There's a catch to it. They register "motivational talks" as one of the things the company does. So the expensive material success is subtracted from tax under advertising costs. A lot of those guys are management consultants who are good at this kind of thing.
It's not illegal or too irresponsible, just extremely cost-ineffective.
> By the way, it is vital to remember that the money you raise IS NOT your money.
But it isn't the investors money either. It is yours to allocate as you see fit but keep in mind that you should always do it to benefit the company and the shareholders.
Beware of backseat driving shareholders or suppliers of convertible notes and other instruments of lending that then want to tell you how to spend their investment/loan (or even with whom), and never agree to spend all or part of an investment with a company allied with one of your investors. You are in charge, you decide.
And beyond that, keep a good eye on your shareholders agreement which could very well place limits on the kind of things you can do with the money you raise, many of those have clauses which can severely constrain your ability to run your business such as being forbidden to move the company (even just to larger offices), hiring of C-level execs and other bits like that. So make sure you fully realize the consequences of entering into a shareholders agreement and do not fold too easily on 'standard clauses' that you feel will cramp your ability to run the company as you see fit.