I gave my startup personal money to cover business expenses. How do I get repaid?

Our answer: if the amount is small, simply reimburse yourself with company funds. For large amounts that could strain finances, you should consider issuing a Founder Promissory Note (FPN) to document the contribution and repayment terms. In any case, meticulous recordkeeping is a must!

You should keep a few considerations in mind.

Qualified Business Expenses

Confirm that your money covers qualified business expenses. A business expense is one that is ordinary, necessary and reasonable in amount in the conduct of your business and industry. This concept is ambiguous by design, so cionsult with your account or tax advisor if you’re unsure.

Reimbursement Amount

For nominal amounts, reimburse yourself when the company has sufficient funds post-incorporation. This approach is quick, easy and minimally burdensome to the company.

For larger amounts that could strain your company’s finance, use an FPN. An FPN formalizes and memorializes your contribution as a debt, outlining repayment terms and the interest. The interest helps compensate you for your contribution, but please consult with legal or tax professionals to avoid problematic interest rates that could inadvertently trigger tax liability.

Convertible Security

You should avoid issuing yourself convertible securities such as Simple Agreement for Future Equity (SAFE) or Convertible Promissory Note (CPN). These can create unnecessary tension with your startup’s current stakeholders and potential investors.

For current stakeholders, equity balance is critical to motivation and fairness. Convertible securities may upset this delicate and important balance unnecessarily.

For future investors, convertible securities usually convert into preferred stock and investors would rather not share their interest in preferred stock with a founder. They want to keep the two worlds separate.

Equity

You should also avoid issuing yourself additional equity as repayment – even more so than issuing a convertible security! This approach risks setting an early-stage valuation too high, complicating cap table sustainability, your ability to issue affordable equity to early employees and advisors, and the company’s growth prospects.

By carefully weighing these considerations, you can protect your personal finances, maintain investor confidence, and still set your startup up for long-term success—without tipping the scales of equity or trust.