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Starting a Small Business/Should I pay a dividend?



Thanks in advance for reading.

I am about to raise seed capital for my business.
The first round will be a convertible offering while the second will be straight equity.
The former will be offered at about a 15% discount to the latter.

That said, I will be raising money from friends and family and would like to offer some method for them to recoup their initial investment.

I was thinking about putting aside (for example) 5% of net profits, starting in year two, to be used as a dividend to our investors.

Does this make sense? Do you have any other creative ways for me to help “sweeten” the above deal by offering some form of profit sharing/payout starting in year two?


Though it is tempting to offer a dividend, for most start up businesses that is not a good idea, and for that reason is very rarely done.  A growing business generally needs its cash.  There are some types of business that are expected to throw off cash at a very early stage and in those cases it may make more sense, but again that is very rare.

Most friends and family investments are made with an eye to the future. Investors understand that investment return is not immediate.  Sharing with the investors a clear picture of how they will get all of their money back and a reasonable return on their investment  is more important than quickly starting a payout.  

Is the plan to start generating significant cash flow? Is the plan to exit through the sale of the business to a larger player in the industry? Is the plan to eventually go public (still a rare occurrence but coming back)?

Whether a dividend makes sense in your particular case depends on your overall strategy.  If your strategy is to build a business that a competitor will want to buy, then that should be your focus. I would not want to confuse things by paying out a token dividend.  If your plan is to create a cash cow, and you have a realistic expectation that you will have free cash flow in year two, then your plan to sweeten the deal makes more sense.  Just don't be overly aggressive with your projections and make promises of distributions that you have to renege on.


Starting a Small Business

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David K. Staub


I am a business and tax attorney and have spent more than 35 years assisting people in starting a wide variety of businesses. I can answer questions about the basic differences between the various entities available to new businesses, including limited liability companies, corporations, S corporations and partnerships. I can provide guidance in other areas facing start ups, such as hiring employees, signing contracts and obtaining necessary licenses. I can also direct people to sources for answers to specific legal questions which cannot be answered in a forum of this nature.


I have an extensive practice in the mergers and acquisitions area and have been involved in the tax and legal issues on hundreds of business transactions.

Staub Anderson LLC
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Harvard Law School, J.D., 1977; University of Illinois, B.S. in Accounting, with highest honors, 1974

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