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In a founder-funded company, how should the founders treat the cash that they contribute to the company? Should it be convertible debt? Equity (but the founders already have all the equity initially)?

If it makes a difference, I'm interested in the following scenarios:

  1. Single founder, cash contributions to the company.
  2. Multiple founders, equal cash contributions from each.
  3. Multiple founders, different cash contributions from each.
  4. Special concerns for non-cash contributions (e.g., computers, furniture, etc.)

Does any of this matter when it comes time to raise money or exit the company? Obviously, it's budget dust if you get a billion dollar valuation like Twitter, but what about in smaller startups?

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4 Answers

up vote 3 down vote accepted

In terms of accounting, any investment by the founders is a part of Owners Equity. If you're doing proper double-entry accounting you'll want to credit an Investments account and debit Cash, or Equipment, or some other asset (assets are increased by debit in accounting... it's confusing, but true).

You could take a look at some accounting basics here to understand this concept better: http://www.moneyinstructor.com/lesson/accountingtransaction.asp

If that doesn't make sense, then definitely consult an accountant. They can get you set up in an hour or two.

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up vote 0 down vote

What if the founder wants to bring in another person to work part-time and then how does it change for the owners equity. Assuming there is a measure of other person's contribution in terms of time and expertise. Would the founder then issue equity on a time+expertise spent basis?

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up vote 1 down vote

Structure it as a loan to the company, with interest.

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up vote 3 down vote

You should talk to an accountant. In my case, as a S-corp, money that goes into the company is considered funding that is to eventually be paid back with interest. No matter what, keep good records!

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