Let's say when a one-founder company owns 100% share. He sells 20% to a VC for $1m. Does this $1m go to the company for its expansion, or founder's pocket, or just a percentage of this money goes to the founder's pocket?
I ask this because the practice is, in future, if the VC sells their 20% share to others for $2m, they pocket the $2m. I stand corrected though.
The money goes to whoever is selling the shares.
If the company is selling the shares, then the money goes into the company's bank account. If the founders are selling shares, then it goes into the founder's personal bank account. In some funding rounds, the company sells shares to the investors AND the founders do as well. This is usually done in a later stage startup where the investors want to give the founders some personal liquidity.
It goes to the company.
Only way to take money out of the business is, assuming accepted by the partners founders can take out dividend. (but obviously when one partner take out money s/he also others get according to their shares )
UPDATE: As Michael pointed out obviously founders can sell their own shares in that case (since it's their OWN shares) it'll go to the share owner's account.
Most VCs and Angels anticipate that the funds they invest in a startup will be used for working capital, not to "cash out" the founder.
Most will insist upon a fairly explicit agreement as to the "use of proceeds." This usually takes the form of a formal budget but sometimes can be a standalone agreement.
It's not unusual for VC money to be used to pay off loans that the founders may have made to the company or to payoff salaries that the founders may have deferred.
Generally VC's will allow (even require) that founders who play an operational role in the company draw a salary that is close to market value.
Sometimes, but very rarely, VC's allow founders to sell some of their equity in second (Series B) or subsequent rounds. Generally VC's like to keep the founders mildly cash hungry so they continue to strive for the really big payday (IPO or ultimate sale of the company).
It totally depens on the VC, the angel, and the partner. Usually, if there is a cash out involved it means that someone is buying your company, and you are holding a minority amount of stock in it, or perhaps stock from the new company buying you.
A fair scenario would be Google buys 90% of your company for 9m, and gives you that in Google Stock (which you cash out immediately) or cash if they have it on hand. The other 10% they would give you in their own stock options, and probably require for you to stay on board for a short period (6-12 mos), after that the only thing they want from you is to honor your non-compete terms.
Most "investors" you find are interested in giving you Working capital. They do consider salaries for founders to be working capital. smart investors know that if you dont have to fight off the repo man, or get a cash advance to buy lunch, you will have lower personal stress and more to devote to the business they invested in. Smart investors also usually live frugally themselves, and will not support a caviar lifestyle salary.