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Startup paying dividends. Is there such a thing?

Has anyone here been in a startup (or seen one, or heard of one) that starts to pay dividends from profits while still being a small private company with few shareholders (founders, seed investors, and first employees)?
If so, what is the minimal revenue/profit that would justify this?

Some context:
Our CEO has suggested that we could start paying dividends as soon as we become profitable in order to give more incentive to employees and investors, but I'm not sure it's a good idea - I believe that it's more important to re-invest profit into growth. What do you think? What other advantages and disadvantages are there for paying dividends in such an early stage?

25 Replies

Stephen Campbell, PMP
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Project Management Professional
Great question. Sorry to troll, just very curious about feedback. Assuming that you're also now aware that the lay investor can now invest in any business via a couple of 3rd party platforms... I may be interested! :)
Dave Lemley
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Dave Lemley Entrepreneur
Consulting Technologist
The purpose of dividends, to wit, is to get excess cash off your books that you do not want to use to re-invest in the company. I've never heard of a startup in that situation (!), but that certainly doesn't mean it doesn't exist. Also, the tax rate on dividends is higher than capital gains, so I don't know that investors in general would prefer that versus, say, expanding the company and having the stock price go up, and then eventually paying capital gains.
David Pariseau
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David Pariseau Entrepreneur
CTO and CoFounder at Particles Plus
Also, typically you want to use any profits to accelerate growth typically toward some exit event. More investment typically = more growth (assuming well managed of course). Is there an employee retention issue, or lack of buy-in from folks as the the company's trajectory? If so, perhaps that's the issue that needs to be addressed?
Ivan Kaye
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Ivan Kaye Entrepreneur
Chairman BSI and BBG
Best thing ever... This shows your commitment to look after and align with your investors... They should be remunerated in proportion to founders
Judith Szepesi
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Judith Szepesi Advisor
Founding Partner and Patent Strategist at HIPLegal LLP
No, I have never heard of such a thing. And I think you may have some legal issues around it. It could easily slip into a Ponzi scheme where you take money from new investors to pay old investors.

If you mean that you have moved into being a profitable company, and are no longer taking investors, and have shifted into a lifestyle company (where you intend to neither go public nor be acquired) your obligation should be to pay back your investors. Dividends are not considered "paying back" your investors their investment.

So if you are in that scenario, I would recommend talking to a competent attorney and drawing up agreements with your investors about how you will pay them back their investment in the company.
Irwin Stein
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
A lot of small companies pay dividends to shareholders. I advise companies that are crowdfunding for investors to issue dividend paying preferred shares to attract investors. Many of the commentators on this board could use a basic course in corporate finance. Every business needs to be well financed, well staffed and operate profitably. I am not suggesting that you deplete the corporate treasury to pay dividends but a reasonable grasp of your own business, its cash flow and profitability should answer this question for you.
Thomas J. Kaled
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Thomas J. Kaled Advisor
Business Development Consultant @ thomas.kaled@gmail.com
@Dimitry RotsteinI have more questions than answers. What is the Corporate Structure that allows investors, founders and employees to hold the same Class of Stock? Are you suggesting that your employees (especially key) have already obtained their performance bonuses or have they an equivalent equity position to investors that dividends will act as an incentive?

@Ivan Kayeand David PariseauI agree with, with the exception that the CEO has an equivalent responsibility to the preservation of the Company and dividends (capital) are the lifeblood of a venture hence @Dave Lemly gives you the long term strategy.

In any case you have an interesting and pleasant challenge. Thank you for posing this business case.
Lisa Ezrol Curran, CFA
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Lisa Ezrol Curran, CFA Entrepreneur
founder Perspicua Strategic Partners
In general, investors look for dividends because they believe they will get a better return on investing the after tax value of that capital outside of the company than they will get in an equity return if the company retains that capital to fund future growth. Companies that generate more cash than they need to fund growth activities often pay dividends with their extra cash or have share buyback programs which offer better tax treatment for most investors. Unless a company is generating enough profit to fully self-fund future growth, paying a dividend decreases the time to a future funding round and hastens the dilution of your current investors. Investors who need a cash return in addition to their equity return will likely demand preferred shares with a guaranteed interest rate rather than want a profit based dividend. From an investor point of view, the willingness of a startup entrepreneur to part with cash can be viewed as a bad sign for the future potential of the company. Think of it this way: They allocated capital to the startup investment because they thought it offered a reasonable likelihood of a high return. By paying a dividend you're telling them you think they'll end up with more money investing 60% - 80% of the dividend elsewhere than they will by letting the company invest 100% of the dividend amount to fund operations & growth. If your CEO is mostly thinking about employees, incorporating a profit sharing component into the compensation package (with shareholder approval) is a good way to get cash to employees without bearing the risk of permanently raising salaries.
Dimitry Kushelevsky
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Dimitry Kushelevsky Entrepreneur
CEO and Co-founder at AiVibe
Hi Dimitry,
First, thank you for spelling your name the RIGHT way :).
As to your question, there are, unfortunately, two plausible, yet mutually exclusive schools of thought. On one side, many successful portfolio managers and individual investors solely invest into companies that pay dividends. They claim that paying dividends is, as you mentioned in your question, a way to "take care of their investors," and it also signifies corporate strength/stability. On the flip side, dividends cost money in administrative expenditures and may often incur greater tax liability to those same investors. There may be legal concerns, too, as mentioned in another reply. On a more strategic level, paying dividends is a loud-and-clear message to the investment community, saying that you no longer have any great opportunities within your company/product(s) to invest into, and you have a high enough reserve of liquidity in the bank...so you'd rather return the "excess" cash you have from your revenues to your investors, who could (ostensibly) make better use of it by investing elsewhere. The other argument against paying dividends is that any individual investor who wants to make some money off your stock can simply sell some of your company's shares from their portfolio. Theoretically, by not paying a dividend, the capitalization of your company should be higher (since the value of the dividend payout stays in your treasury). Of course, theory does not always match reality, but it certainly is something to consider. You can probably guess which strategy I'm leaning toward (especially in the high growth startup environment), but each company is unique, and yours may have circumstances that point to a dividend payout as the more effective use of your "excess" liquidity. I hope this helps!
Martin Omansky
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Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
Rare for start-ups to pay dividends, but not unheard of. Sometimes, if there are profits, employees get bonuses, especially if the investors are interested in equity bumps and don't especially need current income. VC firms behave like this - they want their equity to translate into a multiple of EBITDA or revenue, and are willing to wait. Angel investors sometimes will ask for some current income - dividends being the easiest to distribute. Bonuses to employees are usually justified by explaining that working for a start-up usually means that employees work for less than market-rate salaries, and bonuses based on corporate performance are (a) good for everyone; and (b) constitute a real incentive to team members.One other relevant matter: some angel investors are used to regular dividends or their equivalent because they have collected same from real estate rents, restaurants, convenience store cash flows. etc. Best advice is to use most profits to further grow the company, accumulate dividends and pay them when the company goes through a liquidity event. Such advice is primarily for growth companies. Life-style companies, not so much.
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