Will Investors Bail Me Out?

"I'm looking for some investors to help pay back some of the money I put into my startup through some loans and personal capital. I also took a much lower salary to build this, so I'd like to get back compensation. Are investors willing to cover my debts?"

May 15th, 2024   |    By: Wil Schroter

Some investors may be considered "angels" — but they are no saints!

That's why when it comes to getting "bailed out" by future investors, whether it be compensating us personally for money we've lost or helping to get our startup out of debt, we're entirely on our own. We've helped thousands of Founders raise capital, and invariably, many ask whether new investors would be willing to cover their previous losses or investments. The short answer is "absolutely not." But the longer answer may help you understand exactly why.

What Debts Are We Talking About?

The most common debts Founders ask about are personal debt they've created in financing the company or forgone compensation. The question often looks like, "I've put in $100,000 of my own money and taken a $75,000 reduction in salary to build this. How do I get that paid back by investors?"

You don't — and it sucks.

There's no version where the money we put in will likely ever get explicitly paid back to us. Yes, we can add it as a liability on the balance sheet, and yes, we can certainly ask to be paid back, but that's not the same as actually getting paid back.

The reason we don't get paid back isn't because we didn't "account for it correctly,” it's because there was never an incentive for anyone to pay us back to begin with.

No Need to Invest in Debts

The reason there's no incentive to pay us back is that we're competing with lots of other investments that don't need to get paid back. We have to keep in mind that our investment isn't a singular event, it's a choice amongst many other investments, whether it be in other startups or just other places to invest money.

An angel investor will typically have looked at dozens of startup investment opportunities before they place a single bet. Chances are none of those opportunities are asking the investor to invest in someone else's debt, so why invest in the one startup that is asking for it? If you had the chance to invest in someone's debt or invest in someone's growth, which one would you pick?

Raising a round of funding is hard enough as it is, especially if the company is underwater with debt. Adding a giant "IOU" to the deal is like trying to save someone with an anchor versus a life preserver.

Is there ANY way to get Paid Back?

Yes, but over a very long period of time, which is also a challenge. Every time another round of investors comes on board, whatever the previous investors put in (including us) kind of doesn't matter. The last person to put in money essentially sets the terms for everyone else who put in money before them. And since we're the first person to put money in, we're the last person in line to get paid back.

So, more time equals more investors which is what makes the challenge more difficult. The most common ways we get compensated are increased salaries (which usually isn't much) and of course, the value of our equity (which every investor will say is where our money went to begin with).

The least likely way — I've actually never seen it work—is to create a debt to the company that needs to be paid back (like a Convertible Debt note) that you can somehow hope a future investor honors, but again, the probability of that outcome is near zero. The only way any of us gets whole is to sell this bad boy and get 100x of what we put in. So let's do that!

In Case You Missed It

How to Find Angel Investors One of the hardest things to do is get your foot in the door — anywhere. And that applies to finding angel investors as well. How do you find angel investors? How do you get angel investors to invest in your startup? We’ve got you covered.

How Do I Pitch Friends & Family? How do we ask friends and family for money without it getting totally weird? Is there a way to "pitch" that doesn't leave both sides feeling uncomfortable every Thanksgiving?

How Do I Get People to Take Me Seriously? (podcast) Join Wil and Ryan as they take a deep dive into why it takes so much work to be taken seriously as a new Founder and what we can do to thumb the scales in our favor.


About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

Discuss this Article

Comments
 
Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2024 Startups.com LLC. All rights reserved.