Investing and allocating capital
What Milestones Should Investors Set Before Releasing Additional Startup Capital?
Short answer. Tie each funding stage to specific company needs and results that can be checked before the next release. Agree in advance on the supporting evidence, review timing, and who can approve the payment. Consider paying major expenses directly when appropriate. Staged funding can limit exposure if progress stalls and give the company funds to reach its next stated objective.
Release startup capital in stages, tying each payment to a stated need and results the company can show. Agree on the conditions before sending the first funds. In my experience, staged funding can help a family avoid committing the full amount before the company makes progress. Management can also see what must happen before the next payment.
Set Milestones the Company Can Show
A useful milestone links a business need to evidence you can review. It might involve completing a product step, meeting an operating target, or securing a customer commitment. Other milestones could cover a specific hiring or production task. Fit each one to the company's plan and the purpose of the funds. Use clear wording so both sides can tell whether the goal was met.
Agree on the supporting documents, who will provide them, and when you will review them. Depending on the use of funds, records might include operating reports, contracts, or invoices. Keep the paperwork manageable for an early company. The founders, family, and anyone reviewing the investment record later should be able to understand the basis for the decision.
Link Each Payment to Its Purpose
Pair each milestone with a budget for the next stage. Ask management which costs are needed to reach the next result and what might change the estimate. When appropriate, consider paying a major expense directly to the supplier. This links the payment to a stated business need and clarifies its intended purpose.
Set stages the company can reasonably meet. As the company learns, it may need flexibility. Specify which adjustments management can make and which require another review. Your startup funding milestones should support progress while leaving room for ordinary operating decisions.
Set the Review Process
Before committing, identify who reviews the evidence and who can approve the next payment. If a milestone is missed, you could pause funding, ask for a revised plan, or decline to provide more. The agreement and circumstances will shape the response. Don't treat a missed target as an automatic reason to add money. Review why it happened, the cash remaining, and whether the business case still holds.
Future financing may affect existing owners through dilution or terms that make it harder for later investors to participate. Consider how the proposed stages and rights fit with likely future rounds. Before signing, discuss the documents, legal rights, and tax effects with your attorney and CPA. Assess the decision to join a later funding round based on the company's progress and terms at that time; don't assume the answer at the outset.
Keep a written record of the original milestones, reported results, exceptions, and release decisions. This lets the family track whether payments follow the plan and gives management a clear basis for understanding each decision.
Read next: What should investors examine in a company's plans for using new capital? and How can a family assess a startup's path to sustainable revenue?
It is often valuable to invest in a company through two or three phases instead of investing all the money up front.
Sources: The Single Family Office. Informational only, not financial, legal or tax advice.