Can you reimburse yourself for expenses you had before funding?

One question we’ve been getting a lot from recently funded founders is around whether or not you can reimburse yourselves for business expenses incurred prior to receiving funding. And if so, what expenses are considered reimbursable?

The short answer is, probably yes, and it depends.

This varies and sometimes it is a discussion between the new investors and the founders who have incurred the expenses. The five variables are:

1. Amount of expenses
2. Amount of funding being raised
3. Attitude / style of the investor
4. What the expenses are for
5. How they are being accounted for

Amount of expenses

As the amount of expenses increases, the willingness of the investor to be ok with a reimbursement for any of them decreases. This is directly linked to the amount of funding being raised. As a decent rule for seed/pre-seed startups, reimbursable expenses should not exceed 1-5% or $5-$25k of the total raise — whichever is less. Would love to hear from angels and VC’s in the comments about thresholds they care about.

Amount of funding being raised

If $500k is being raised and the founders are being reimbursed $20,000, an investor will likely be ok with this. However, if $500k is being raised and the expenses are $250k, it’s unlikely that an investor will be ok with 50% of the proceeds going to paying founders back for expenses that have already happened. You should definitely consider bringing this up with your investors if your prior expenses are greater than 5% or $25,000 (whichever is less) of the amount raised. As a data point, I have founded 2 venture backed startups and as founders we reimbursed ourselves and never had to discuss this with our investors or had an investor bring it up after the fact — we stayed below that threshold.

Attitude / style of the investor

The attitude and style of the investor matters the most. Some investors are adamantly opposed to the idea of paying the founders back any expenses. Most good investors are more flexible/reasonable, and are happy to take the financial pressure off of the founders who have dug themselves in a hole of debt to get started. Investors want to trust your judgement. If they invested in you, they trust you; don’t break that trust. Ultimately, there is no exact rule – it’s just part of practicing good judgment as a newly venture backed founder building trust with your investors.

What qualifies as a reimbursable business expense?

According to the Internal Revenue Service (IRS), a business expense is a cost that is incurred in the course of conducting business. In order to qualify as a deductible business expense, the cost must be “ordinary and necessary”. This means that the expense must be common and accepted in the industry, and it must be helpful and appropriate for the business. Examples of deductible business expenses include salaries and wages, office rent, laptops, utilities, insurance, and supplies.

Do meals count as reimbursable business expenses?

In order for a meal to qualify as a business expense, it must be directly related to or associated with the conduct of the business. This means that the meal must be taken in the course of conducting business, and it must be directly related to the business. For example, a meal taken with a customer or potential customer to discuss their pain points would be considered a business expense, as would a meal taken during a business trip. However, a meal taken with friends or family for personal reasons would not be considered a business expense.

In general, a meal taken with a co-founder or co-worker would not be considered a deductible business expense, unless the purpose of the meal is directly related to the conduct of the business. For example, if the co-founders are discussing business strategies or reviewing analytics during the meal, it could be considered a business expense. However, if the meal is purely social and not directly related to the conduct of the business, it would not be considered a deductible business expense.

How do I track these and get reimbursed by my startup?

For prior expenses, founders should track their business expenses in a detailed and organized manner in order to be reimbursed. This typically involves keeping receipts for all business expenses over $100 and recording them in a spreadsheet. It is also important for founders to keep track of the purpose of each expense and any associated business activity, in order to support the business purpose of the expense. This will be useful if the expenses are audited by the IRS or if the founders need to provide documentation to support their reimbursement request. Provide this spreadsheet to your accountant so they can update your books to reflect these business expenses for your tax return, as well as record the total amount that the company owes you back.

If you would like a template for this, go here →

For future expenses, stop using your personal card asap. 

Now that you have funding you should stop using your personal card for business expenses. Get your corporate debit or credit card set up and run all business expenses through that from now on.

Have more questions?

Check out our Founder’s Guide to Corporate Taxes for details about your startup’s tax filing requirements and deadlines.

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Disclaimer

This blog for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.