It is usually not a good idea to make a habit of paying expenses from a personal account if it can be avoided. Founders, friends, family, and angel investors can contribute cash to a company savings account. I call this account “the Well”.
The Well is a pool of funds from which payments can be made. Managers can use the money for whatever they need to, subject to the restrictions of the investor, if any. You can pay salaries or rent, for instance, with money you draw from the Well.
Money in the Well does not receive any slices when it is deposited. Instead, slices are given when the money is spent. Remember, slices represent risk in a startup. If cash is sitting in a savings account, it’s not really at risk because managers could simply return the money to the investor. It is at risk only when it is spent or otherwise tied up. For instance, your landlord may require a security deposit. Money in your landlord’s account is at risk.
When money is drawn from the Well and put into a company checking
account to pay bills, it converts to slices for each Well participant in
proportion to their current ownership of the Well money. Because it converts to
slices at the higher cash multiplier, managers are always mindful not to
overspend. This is a good thing because it helps them focus and be smart with
money. This, like all aspects of the model, aligns the interest of the
investors and employees.
For example, Julie and Chuck want to help Anne start a cinnamon roll shop and they each put $10,000 in to a company savings account for a total Well of $20,000. Anne needs $1,000 to cover the current month’s expenses so she transfers the money to the company checking account. Because both Julie and Chuck have 50% ownership of the cash in the Well, $500 is attributed to each of them and they each receive 2,000 slices of Pie (cash times four). The following month, Anne draws an additional $4,000 from the Well. Julie and Chuck each receive 8,000 slices. Anne is careful only to draw what she actually needs so she doesn’t have to give up too many slices. Julie and Chuck know that she has an incentive to be smart with their money.
Now the Well has $15,000 left. Suzanne is an investor who gives her another $15,000, so now the Well is $30,000. Suzanne owns 50% and Julie and Chuck each own 25%.
Anne buys an oven that costs $10,000. $5,000 is attributed to Suzanne so she receives 20,000 slices. Julie and Chuck each receive 10,000 slices for their $2,500 contribution or 25% of the total.
The Well helps managers keep money on hand, but protects the Pie from being “swamped” by too much cash. Cash converts to slices only when it is consumed.
Slicing Pie Attorneys can provide a simple Well agreement for people who contribute to the Well. Visit SlicingPie.com and look for “A La Mode” under the Book tab.
The Well agreement is basically a loan agreement for money that goes into the company savings account where it will stay until it is used. When cash is drawn from the savings account the amount of the withdrawal is treated as a payment towards the balance on the loan. At the same time, the money converts to slices in the Pie.
Unless required by law, there is no interest on the Well agreement. When people put money into the Well, their intent isn’t to make loans with loan interest. If they are, they should ask for a traditional loan. Adding interest to a Well agreement is splitting hairs and not necessary to keep the model fair.