Dear SaaStr: Is It a Bad Idea for Founders To Invest Their Own Money Into a Funding Round?
No — but it depends on how much, and how much that is of their net worth.
One way or another, every founder is going to invest some of their own money, at least a tiny bit, to get a startup off the ground. As well as a ton of soft costs and lost income.
Where I get worried as an investor is if it’s too much as a percent of their savings. If a founder has made, say, $500,000 from being early at Salesforce or Uber or wherever, and puts all of it into the startup … I worry they may make the wrong decisions because they are too worried about losing all their savings.
It may be OK. I’ve done it before — I signed a $750,000 full-recourse promissory note in my first start-up, which far exceeded my savings at the time.
Some “skin in the game” one way or another is important. It aligns interests.
But usually, when I invest, part of the reason is to de-stress the money side of things. I want the founders to start taking a salary, at least a modest one, if they haven’t. I want the founders to make that extra hire. I want to put them in a position where they can grow faster.
I don’t want them worrying that their entire life savings could go up in smoke. That doesn’t help you grow faster.
That adds risk to my investment. I don’t like it.
As another example, I recently invested in a great second-time founder. While on paper, he was worth a lot, he had about $20m in liquid savings — yes, a lot. But his startup was raising $5m. He put in $1m of his own money. That’s 5% of his net worth. That sounds about right, and enough, for most folks.
(note: an updated SaaStr Classic answer)