By Palak Devpura
A headline announces that a startup has raised $15 million. Friends congratulate the founder. Relatives assume a new house is coming. On social media, the company looks like an overnight success.
But the founder may still be paying rent from an ordinary monthly salary.
That is not necessarily a contradiction. It is how startup financing works.
When investors put money into a company through a primary funding round, the cash generally goes to the company, not directly to the founders. The money may fund hiring, product development, marketing and day-to-day operations. The founder may own shares worth a substantial amount on paper without having equivalent cash in a bank account.
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Consider a simplified example. A founder retains 20% of a startup valued at $50 million after a round. On paper, that stake appears to be worth $10 million. But there may be no buyer willing to purchase those shares today, and private-company shares often face transfer restrictions.
Even the headline valuation needs context. Investors may hold preferred shares carrying liquidation preferences, which can affect how proceeds are distributed if the company is sold. A valuation reached during fundraising is not a promise that every share can be sold for the same economic value.
Founders sometimes obtain liquidity through a secondary transaction, when a buyer purchases some of their existing shares. Such sales can help founders meet personal needs without waiting for an IPO or acquisition. But they usually require approvals, willing buyers and agreement on price. Many startups never offer that opportunity.
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Why not simply draw a bigger salary? Investors generally expect startup cash to be spent responsibly. Founder compensation is negotiated in light of the company’s stage, resources and governance arrangements. Underpaying founders can create stress; paying themselves extravagantly from fresh capital can undermine trust.
There is also another uncomfortable reality: valuation can fall. The company may need more funding at less attractive terms, or fail altogether. Paper wealth can disappear long before anyone converts it into cash.
Founders should distinguish three things: the company’s fundraising, the estimated value of their shares and their actual personal liquidity.
A successful funding announcement shows that investors have backed a business plan. It does not mean the people who built the company have already collected their reward.
(Palak Devpura is co-founder of Spinach Laws, a startup-focused legal services firm advising founders on incorporation, brand protection and cross-border transactions. This column is part of the ongoing Spinach Laws × The American Bazaar series on law for founders.)