Bootstrapping a small company.

How to treat your working/investing directors.

When a company is at it’s early stages there are difficult choices for the company directors to take, one of the hardest is with regards to monthly salaries. It may be thought that the done thing is to manly endeavor for months without taking a salary, while all the time fooling yourselves that your potential 2nd round investor will think you’re great financial stewards.

Any investor worth their salt is going to be looking at the books and seeing how the performance of the business is month on month, and will look at the business shareholdings, then at the directors salary and do a calculation as to the viability of becoming an investor who will be able to demand fair returns for the investment.

While the investor will know that if a company director is not taking a salary they will either expect to pay themselves in large lump sums or may end up finding creative ways to live off the companies credit.

Share awards

Clearly in a new company there will be Founders, 1st round directors, 2nd round directors etc, with each round of directors the vesting time will normally remain the same for a nominated number of shares to be fully released. While it is widely accepted that those starting as 1st round directors in the company are taking the most risk they will expect to receive more shares than say directors that stood back and waited for the company to operate before jumping from one company to the new company.

With the thought of shares removed, if it is accepted that the company will not be in profit for the first couple or more years, then there won’t be any dividends awarded and thus the directors who are working in the company will need some form of salary to be able to put a roof over their heads and eat the obligatory rice and beans, or pot noodle which every is your favorite!

From the outset an equal and absolutely regular minimum stipend should be drawn up, while it is clear from the earlier discussion of founders and rounds of directors, all the directors will not be bringing equal assets, whether financial or practical experience. While it is important for group cohesion that all “investors” of time and money are treated equally, except of course for the initial shareholder agreement and division of shares.

So where can this go wrong, for example in a small business each director will have their own financial reserves, without a crystal ball no one can predict a day when a profit is made, while a CEO and Sales Director could be using a company credit card to fill their car tanks, and eat out each day, other directors may have cars needing replacing or mortgages to pay. It can be easy for a bubble of division to occur within the business, of the haves and have nots.

The important point is the core group will be bringing the company to a successful status to enable the company to make a profit, and thus an attractive proposition for investment and thus more profit can be made.