Dear Doctor, can my co-founder and I ask for a salary with our first Seed investment? We have our SEIS approval and we want to get the full £150,000 to keep the company running as long as possible, but we also need salaries to live (or we will have to move back to our parents and not be together each day). Will we be expected to not take a salary? Or should we add the salaries on top of what we need to start the company?
Michael O'Brien says...
Michael O'Brien from chartered accountants and financial advisers Kreston Reeves answers a reader's question about whether those raising Seed funding can expect to take a salary.
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Congratulations on getting the SEIS approval (technically called ‘advance assurance’). This isn’t really a tax question, more a commercial one. Our experience is that no sensible investor wants the founders to be out on the street, or even living with their parents! However, they also don’t want all their investment going directly out to the founders in forms of salary.
A key element in securing funding is a proper business plan that identifies the need for funding and how it will be used. Transparency with your potential investors is key here.
A successful initial funding with positive feedback from the investors as to how you have handled the process and kept them informed will go a long way in helping secure subsequent funding. The opposite is also true – no matter how good your product might be, if your investors are surprised that their cash has been used to pay your salary, then the chances of getting subsequent funding is remote.
In practical terms, you need to be pitching the salary requirements at the minimum amount on which to live. Investors expect founders to work hard for the business, and assume the reward will be on eventual growth and exit.
You also need to factor into the calculation that to qualify for R&D tax credits, you need to have a PAYE and NIC liability in the company. This only comes from paying salaries – this should also be factored into the business plan and be part of the story to investors.
For further information on this topic contact Michael O’Brien here.