How best to account for using personal funds to develop a startup?

We incorporated and allocated shares to two co-founders in our startup for minimal investment (a few dollars).  We have subsequently used a lot of our own personal funds to build the startup, and a third party company (owned by founders) has also spent funds to build the startup.

How best shall we account for this personal investment vis-a-vis seeking formal investment in the future?  The startup is still pre-revenue.

Options seem to be:

1. Ignore this use of external funds as the founders already have shares in the company (and no-one else does).  This is clean but may make the startup look like it sprang out of no-where to investors, e.g. how was the software development funded?

2. Get the startup to pay the founders and other company for the funds expended on the startup.  Since the startup does not have any income yet, the best that could be done in this regard would be to acknowledge a loan from the founders.   Do investors like debt to the founders?

3. Allocate further shares to the founders to compensate for the funds spent on developing the startup, which is equivalent to paying out the loan with shares.  Is this really useful because the founders already have shares… what would investors think of this?

Again, trying to set this up so that it looks inviting and sensible to investors.  I guess we should have just invested the funds directly into the startup and then paid for expenses from the startups account but I also assume many startups are somewhat messy like this at the start.

Finally, are there any good accounting sites for startups specifically?  E.g. how best to setup the books and keep the company so it is investor friendly?

  • Don’t worry about it for the time being. You just make sure your books are in order so you know exactly how much each founder invested. Investors need to know the company owns the IP of the software that has been developed so far, so if you’re working with contractors or employees you need to have real employment contracts in place.

    Later when presenting your business to investors put a slide in explaining how much money has been invested so far and how much money you need for the next milestones. When investors are ready to write the check have your lawyers formalize the investment terms of the money the founders put in already.

  • I would write the money into a convertible note or SAFE, both of which can be found for free on YCombinator. You can always declare them void, but that will work for records keeping purposes.

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