* If your payables and debts are all in the company's name, nobody is coming for your house. The likelihood that your business was going to die before you could pay all your debts was priced into your contracts. If you have employees, pay them and get them off your books first; employee wages are, depending on the state you're in, the one likely exception to that rule.
* If they were in your name, well, that sucks, but still nobody is coming for your house. Your credit rating will probably absorb all the damage. I've had shitty credit all my life, so much so that it used to make it hard to get checking accounts (I'm not a deadbeat, I just don't have revolving credit, and do have billing disputes that I don't have time to resolve). Shitty credit is not that big of a deal. Just don't use credit.
* It sounds like your wife is right. The existence of startups isn't a guarantee that you'll never need to work for someone else again. The normal life cycle of a startup founder is, (1) work for someone else, (2) start company, (3) run company into ground, (4) goto 1. Think of it this way: had your company been successful, it almost certainly would have left you in a state where you'd be working for someone else for a couple years during your earnout. "Not working for someone else" was never really on the table.
* Getting a company funded and then running it is a resume plus. You won't have more trouble getting another job than you did getting the one you left to start this company.
* Your investors expected you to fail. The odds were always overwhelmingly that you would. The whole startup investment model is, put money into 10 companies, hope 1 succeeds. Your investors are professionals. Let their problems remain their problems.
* Are you going to get ridiculed for failing? Obviously, you're not an HN reader. You'd have gotten ridiculed for succeeding. Ridicule is the air we breathe. Why do you care?
* Most small companies start from nothing. That's good news, because "nothing" is an easy state to achieve. Give yourself a couple years, and then try again.
In addition to Thomas being right about employee wages being able to "pierce the veil" in many states, they're the people most at risk in this situation, so you owe it to them to make sure they're taken care of. It's the one circumstance where I would backstop a company problem with personal funds. (If your company was also behind on e.g. rent or hosting, on the other hand, that risk was priced into contractual terms, like Thomas said. I'd generally prefer to make vendors whole where possible but I wouldn't lose sleep over it.)
With regards to your own situation: you're in the best hiring market in the history of ever. Reach out to your incubator's network and you'll have attractive job offers starting as early as you can accept them. That isn't the whole of the solution set: Big Daddy G and the rest of the tech industry are hiring like mad, too, and they are also throwing around signing bonuses large enough to cover your last few months of salary nonpayment.
P.S. to other HNers: "And then we didn't pay ourselves salary" strikes me as something I hear from a lot of failed funded startups which magnifies the personal financial risk of doing them significantly without meaningfully increasing the chance you'll pull things through. I'd strongly consider not doing that, again, unless the alternative is missing payroll for your other employees.
The dumbest thing I've ever done in my career was to start a "founders don't take salary" company after earning a windfall from the sale of the last company I'd been at. Most companies fail. That company was no exception. The personal cost was spectacular.
Most HN'ers seem to be in their mid-20s. Something you'll learn when you cross 30 is that time is more valuable than money. You'll never get the years you spend chasing a doomed idea back. If forgoing a salary seems to be a make-break issue for your idea, pick a better idea.
Yup, if only someone had been there to stop me from doing the same. I poured everything into a failing company because I couldn't bear the thought of failure or working for someone else.
I even put in the money I'd set aside for the IRS, telling myself I'd get it back as soon as a big contract we were working on came through. And then it didn't.
Failure is always an option. The aftermath just keeps getting worse the longer you stave it off.
I'm trying to understand the context and limits of your advice, in light of the chicken-and-egg problem of getting people to invest in or buy your product before proving it out, which usually requires building something to show it's possible, which usually requires quitting your previous employer so they don't own it. Are you suggesting that forgoing salary shouldn't be a substitute for thinking about your revenue model, which I'd probably agree with? That thinking "I have money in the bank, I'm fine for now" makes you less hungry and less likely to take the actions you need to succeed? That one should know when to quit and should never let dreams get in the way of facts?
Or are you saying that forgoing salary is always a bad idea? If you are, how else are we supposed to start a product company? It seems like it's a worse idea to take investment without having done some minimal homework and prototyping to prove out the market, which usually requires at least building something you can show to customers. It's a very bad idea from a legal standpoint to do that work while you're still employed by somebody else. Consulting -> product conversions can work, but it's often really hard to make time for product development while consulting.
From my own perspective - I started a "founders don't take salary" company when I was 2 years out of college. It failed miserably, predictably - it was a terrible idea to begin with, and I folded it up once I realized I was in over my head. But I think starting it was one of the best decisions I made in my lifetime, because the skills and perspective I gained from it got me a job that paid enough that I made back that year after about a year of employment. I'm now in a position where I have a bunch saved up, and I'm trying to weigh my options rationally. I'd like to avoid making stupid mistakes, but I'm also mindful of how the #1 regret of most elderly people, on their deathbeds, is that they wish they'd taken more risks.
The idea that you should preserve investor's cash is a good notion, but not at the cost of forgoing fair compensation to yourself and the early founding team. In the long run, everyone is better off from this approach.
(1) Good investors run (on average) profitable portfolios, and they are not going to be made or broken by pennies on the dollar from the disposition of the firm's assets in a bakruptcy.
(2) Good founders should have enough 'skin in the game' that the signalling behaviour forgone by avoiding this strategy should not be the make-or-break between succusseful outside investment (or not).
(3) Following up, if (1) and (2) are in place, everyone is best served by having the founding team fully solvent. Preferably before and after the company succeeds or fails. All of the principal founders, investors, and employees want each other to be thinking clearly, rationally, and open-mindedly...with well-understood motives.
I can easily see paying yourself living expenses, once you've taken investment (or have paying customers), as a good thing. That's basically "ramen profitability", and getting to there as fast as possible is important.
I'm wondering about the part before taking investment - when you don't have any money coming in, are still building out a product (or even a prototype), and have cash in your personal bank but none in the corporate bank. Is it appropriate to pay yourself nothing then? Should you make this phase as short as possible? (Well, obviously yes, but in practice this means a lot of different trade-offs, like picking a less ambitious project that you can complete more quickly, or doing consulting to bootstrap the business, or pivoting to a business that focuses on profit more than userbase, or not doing a startup at all. At what point should you be willing to sacrifice future possible gains to ensure that you have money coming in to cover your living expenses?)
I'm sorry I might have misunderstood you. But if you have money in your personal bank and none in the corporate bank, why would you pay yourself (and be taxed on it) rather than just use the money (your money) to cover the living expenses?
That's what I'm trying to understand from tptacek's post. Some hypotheses that come to mind:
1.) Putting money into the corporate bank and then taking it out as a nominal salary keeps you really honest with yourself. You can't say "There's money in my bank account, there's not much need for urgency", instead you see the corporate bank account dribbling dry just as if it were someone else you were paying.
2.) It reduces personal risk in case the startup goes bankrupt.
3.) It makes accounting & record-keeping easier for when the startup actually does start making money, since you already have systems setup.
4.) Minimum wage laws require it. I talked to a (Massachusetts-based) lawyer once that suggested this may be an issue. But then, if it is, how does that square with all the tech company CEOs that take $1 salaries?
5.) It lets you take advantage of certain personal financial products that are only available if you have earned income in a year, eg. Roth IRAs.
Re: 4, my understanding has been that the owner of a company does not have to necessarily be treated like an employee of the company, and that salary issues may be different for them. Also, most of those $1/year CEOs are usually earning many, many dollars in options, which I think count for the compensation rules.
The only time a founder should forego salary is before anyone else has invested a dime. And in that case, the paperwork should specify that you are earning a salary but it is deferred, ie you are lending that money back to the company.
Once a real investor enters the picture, if you can't pay yourself even a reduced salary (say 60% market rate), you're not raising enough money and/or you have a sucky investor. Add to the 60% salary with some of that back pay you are owed, or convert the back pay into equity at a favorable (to you) valuation.
Typically, investors don't like it, and it tends not to be paid out in cash. However, I believe setting your books up that way gives you a better negotiating position when it comes to how low your salary will be, and possibly in relation to equity issues. It's a matter of having that sacrifice (no salary for X months) on paper so it can be respected as a real contribution with a concrete value, rather than just a giveaway that is somehow expected of a founder.
If you ever watch Shark Tank (which has become remarkably redundant), you'll note that each shark has a certain style (no doubt born of his/her own experience/personality).
Cuban is always harping about sacrifice, breathing the dream, not taking a salary, etc. The story goes that if you want it bad enough, you'll make the sacrifices. This has become a common belief that is propagated about entrepreneurship.
I've come to believe that it's absolute nonsense. Engaging in self-destructive behavior does not have to be a core tenant of entrepreneurship nor some proof of passion or dedication. And, at what point is the entrepreneur just a slave to the investor? Some will say, "well, the investor is risking her money". Sure, but she is only doing so because, presumably, she can afford it. In other words, it is a discretionary "luxury" for the investor to invest, whereas it can be a subsistence-level sacrifice for the entrepreneur to go without a salary.
Whether it's a failing bootstrapped company or funded venture wherein investors require an unreasonably small salary or none at all, this is not good. And, for people who go the entrepreneurship route for "freedom", the effect can be the opposite. Not having an income introduces stresses and risks that represent anything but freedom.
I'm not a huge fan of Rich Dad Poor Dad and the cult of Kiyosaki, but that was the first place I heard about the adage "pay yourself first".
I think a lot about that, not just in financial terms, but emotional as well. If you can't take care of yourself, you won't be able to sustain taking care of other things, no matter whether those other things are businesses, employees, personal bills, or loved ones.
That philosophy is also in The Richest Man in Babylon and every single book written on finances ever. If you can't pay yourself first, you will never save anything.
I've been on the fence for years about a few ideas. As time marches on and more risk acrues I feel in an exponential trap of not having the time to make a mistake. In lieu of this I've set myself up to break financial headwind and offer up the position at my, estimated, last opportunity in time (at least for now).
Thanks for the insight. Always appreciate your comments and insight. Although, the credit piece, has to be a royal PitA at times. Luckily I have no issues there at present time.
Not paying yourself is fooling yourself into believing you have a sustainable business.
What you have is a source of revenue (not income) and it should be mentally in the "side projects" category. I.e. you should probably have a job and do this on the side.
The stories about people who didn't pay themselves but finally made it are far between and is not recommended IMHO.
Not paying yourself is bad since it constantly makes you worry - which in turn is really bad for your company. Figure out a fair and low salary you can pay yourself and be 100% emotionally invested in your company without worrying.
Agreed. I guess you mean "worrying about family" at the end.
With investment equity in place, why the cofounders and employees are not paid? How to calculate? They must be paid and reload as owner's paid-in later if the company is running out of fund. If they don't like to follow business rules, then how can we help? Just like there is a wall, you'd like to hit it by not walking around it.
Isn't not paying yourself simply an amortized investment of your own money into the business? As long as you are getting a good equity deal on that, and you could make that same investment at the outset, but don't HAVE to - why not?
You're not making the same investment at the outset: you're doubling down after the business has already demonstrated "I'm failing quickly, unlike the median funded startup, which is failing marginally less quickly." [+] In return for assuming that extra risk, you get no marginal gain in equity.
If you absolutely must shoot your own foot, clean the wound after doing so, because gangrene sucks even more than gunshots (though that is not an argument for gunshots). Continue taking a salary. Loan your take home pay back to the company. Get a written IOU. In the unlikely event that the company goes on to thrive, the company can repay that IOU like it repays any other debt.
This is a really stupid lending decision by any objective measure. You're loaning money at a ridiculously below-market interest rate to a company which you know to be failing and where you know that you have zero ability to meaningfully collect from the principals (because moving money from your left pocket to your right pocket doesn't help you). You are not getting additional equity for this loan, like e.g. a convertible note would entitle you to. ("Why not make it a convertible note?" Because your existing investors will go apeshit if you self-deal. Founder equity only ever goes down, never up. That's as close to an iron law as the Valley has.) But it's less stupid than simply forgoing your salary for a while, because there's less downside with the taxman (whether the company succeeds or fails) and the possibility of you being made whole again if the company succeeds.
[+] Not making fun of anybody here. You care about your burn rate and cash on hand for a reason. Cash on hand divided by burn rate equals how many months you have until the business fails, absent an injection of extra capital.
I still don't get why it's a bad idea to forgo salary in a venture where you retain majority ownership. It sure seems like there are loads and loads of people who spun up successful businesses on sweat equity. Way more than have ever taken funding.
If it's not a capital intensive business and your cost of living is low, why on earth wouldn't you minimize investors to the extent possible? If you've got $300k in savings and cheap digs, your percentage ownership of the upside is the concern, not getting a check for $3k every month.
We're talking past each other, I think. I don't have any problem with bootstrapping (as my biography probably makes pretty clear) and understand that, under many business models, bootstrappers will go cash-flow negative early on. Not a problem.
At a funded startup, though, you've already committed to "We either grow big or fail ingloriously." If your personal paycheck is the difference between solvency and insolvency, you've already failed ingloriously. That's fine and expected, but don't put your family's financial situation at further risk by deferring the paycheck for the final few months.
There were a lot of "ifs" in that comment. Unlikely he has 300k in savings, if he did he wouldn't be scared. Also unlikely his cost of living is low if he lives anywhere near the valley and has a wife and/or kids.
If you have tons of money in the bank and have a really low cost of living, and your business isn't capital intensive, sure you can skip a few paychecks. Even then, the small salary you are taking likely isn't meaningfully impacting the startups runway. Maybe extend it just slightly. And as you are doing it you are lowering your own savings and personal "runway".
I ran my first startup as a "We don't pay ourselves" kind of thing. Actually mostly me, the other founder was side-jobbing as a freelancer.
I'm not sure how big a factor it was, but being dirt poor did not help that startup. And it just hurt all that much more when it all came tumbling down.
I think your problem is not because you don't have a side job. It's all about how to deal with partnership type of business.
If you don't have external funding, cofounders may choose to bootstrap the company, but you must have written down contracts about how the partnership will go, and register it with city/county or the State of Secretory. If you don't, you may hurt all of you no matter you all have income or even if you are rich. And the partnership cannot last long without such kind of contract and agreement. Some startups failed even before the fund pending because the partners cannot agree on the equity distribution.
I'm surprised that both you and tptacek seem to think it's much less of a deal to pay back vendors. Say the vendor is a startup or otherwise small company who's survival is hinged on getting paid what you owe. It's okay to stiff them, because we can get away with it legally?
I think it's downright dishonorable to leave vendors hanging like that.
Terminate your venture in time, before you can't afford to pay what you owe. There shouldn't be any difference whether it's an employee or a vendor.
I'm in favor of paying one's debts, have a credit record which would do a Lannister proud, and would not incur any obligation which I did not have the good faith intention to repay as agreed. It's just that I feel an extra special obligation to employees, on account of their unique relationship to their employer, their (presumed) degree of dependence on that relationship, and a heritage as both a Catholic and a Japanese salaryman which suggests that not paying an employee their due wages is a crime which cries out to heaven for vengeance. (For those folks in the peanut gallery who aren't Catholic or Japanese salarymen: that's a thing for both, and it is a thing called exactly that by Catholics. I'm aware many HNers don't necessarily believe in it, but that doesn't make me believe in it less.)
Vendors do not enjoy this status, although I'd make all reasonable efforts to have a business which I control pay them as agreed. Reasonable efforts includes things like cash flow juggling, taking out debts in the name of the business, or reducing the size of my distributions. They do not include my family experiencing hardship on your business' account.
Vendors are not assumed to be as vulnerable as employees. They typically have far less concentration of income and far higher savvy with regards to the necessity of, e.g., keeping a cushion against the risk of receivables going sour.
I run a small company. I work with lots of other ones. Of the entire set of them, nobody is one invoice from death. If we were, we'd be dead, because we're well aware that individual invoices go missing all the damn time. That's baked into running a business with businesses as clients.
That's also part of the reason why, when I do business with companies as a vendor and not as an employee, I charge a significant premium to what I'd earn as an employee. The possibility of your business going belly up prior to paying my invoice exists. I already priced it into my weekly rate (or your monthly rate for services or whatever). If one of my clients was unable to pay due to their business ceasing to be a going concern, as a responsible businessman, when apprised of that I'd say "Wow, sorry. OK." and write off the debt. It happens. My accountant could probably tell you how much it cost us last year.
If the business owner said "I'd really feel better paying you out of my own pocket for this." I'd literally refuse their money. It's not their family's responsibility to backstop my business' cash flow management. That's my job, and part of the reason why I "earn the big bucks", for values of big which are pretty modest.
(Prudentially speaking I'd probably treat a solo freelancer on a long term contract as an employee for the purpose of "Should I reimburse this guy out of my own pocket?", but as a former consultant, I'd advise any of my freelancing friends to structure their affairs such that they don't depend on payment of every invoice.)
A big question in this is what constitutes a vendor.
People who are experienced enough to price the risk into contracts, manage cashflow and not put all eggs into one basket won't get burned from a customers' insolvency.
But that comes from experience. Young people or the typical specialist such as a carpenter or electrician, are not necessarily this experienced in business.
In my view there's no line between such a vendor, and an individual who happens to be on the payroll. There might be legally, but they are equally entitled to payment for their work.
I'm sure neither you nor Thomas are ones to screw people over. But I think there's too much self-absolution of responsibility in startup circles, and your posts initially seemed to talk that point of view.
It boils down to being a decent person and stopping a venture before puting other people in financial jeopardy. Don't cry over the venture capitalists losses. But do make whole the people who have worked hard for you, whether employed or not.
If you didn't mislead the vendors, there's no dishonor in failure.
We all take risks... you shouldn't do what some retailers often do (load up on inventory, then go bankrupt) but at the end of the day, your obligation is to pay the employees and the government their due. Everyone else gets pennies on the dollar.
At the top of your payment priority list: Remit to the U.S. Treasury the required withholding for employees' federal income-tax and Social Security / Medicare tax. The IRS will come for your house if you don't.
I wrote a comment here about how the IRS is actually not that unreasonable when it comes to owing more than you can pay (been there, too!), but then reread DC's comment and saw that he's talking about withholdings for employees. Yeah, don't fuck around with that.
2nd that - my parents lost their business. Before they did, their idiotic "accountant" lied to my dad about having paid withholdings. They went into receivership actually owing a great deal in taxes that they could have paid (they paid other creditors first). My parents lost everything and are still in deep trouble w/ the IRS. Pay your taxes before anything else.
> * Are you going to get ridiculed for failing? Obviously,
you're not an HN reader. You'd have gotten ridiculed for succeeding. Ridicule is the air we breathe. Why do you care?
Haha, so true. Failure is lauded; success is criticized and mocked mercilessly.
THANK YOU!
I came in here to write something similar, but you said it much clearer.
I was lucky - when my first Startup Free.TV died, the company did not go bankrupt, but it did kill my credit.
I was also worried about what I would tell my wife - the great news is is was VERY hard, but she stood by me and we are still married ten years later.
I have eventually gotten the courage to start another startup, but now is that I now know how the system works and will not sell equity for peanuts anymore. This does hold me back - I would not say I am scared, just more careful.
There IS life afterwards. If you want to talk, email me HACKER at Free dot TV
You realize that your credit record effects more than just your ability to get credit and other financial services right? Insurance companies will sometimes deny coverage based on information in your credit record. ie: health insurance.
Health insurance companies can no longer deny coverage based on credit scores, although apparently credit scores can impact your rates. Like I said: I have a very crappy credit score, and it's had no impact on my life (including the times I've tried to buy private health insurance, which was a nightmare for reasons having nothing to do with credit and everything to do with the fact that the ACA hadn't passed yet). Other than, yknow, to keep me out of the market for credit. A good thing.
Either way: the author is worried that someone's going to come for their house because of their startup debts. I don't think it's productive to mine for reasons to be anxious. Bad credit score? Join the club; there are millions and millions of us: we're called "Americans". Nobody is taking the house.
Protip: many landlords in hot property markets like Vancouver are speculators who are using your rent to pay their mortgage. Offer to pay a year's worth of rent up front in return for a discount (I'd ask for 3% - more than you can get from a risk-free investment but less than the landlord's mortgage interest rate).
Obviously this only applies if you have sufficient liquidity that paying $30,000+ upfront isn't going to impact your life in other ways.
Alas, the BC Residential Tenancy Act makes it illegal to have a deposit larger than one month's rent. Not that anyone is going to stop you -- but if you pay 12 months of rent in advance, you can legally demand the next day to have 11 of those months of rent returned to you. Unfortunately the law is very clear that you can't sign away your right to only pay one month of deposit -- even if you want to.
> Health insurance companies can no longer deny coverage based on credit scores, although apparently credit scores can impact your rates
I don't believe that's the case anymore since they have to provide coverage. Smoking is the only thing I remember that affects your ACA compliant rates. It makes sense otherwise you would be forced to purchase a product that could be much more expensive for the simple act of not having credit history (something that's not so unusual, especially for younger people).
An insurer can also charge up to 3x rates based on age under the ACA. Prior to the ACA limiting the differential the market spread was about 5x from young to old in terms of age.
Smokers only have to pay 50% more so being old will effect your rates more than smoking will under the ACA.
"which was a nightmare for reasons having nothing to do with credit"
So that's why I bring this up, I remember you claiming in another thread discussing the ACA that you were perplexed why you couldn't get private health insurance and seemed to think it was some arbitrary conspiracy yet you seem to disregard any number of reasons upon which a rational insurance company might do such a thing. Just pointing out your logic may be flawed.
agreed, this has changed drastically in the last 25 years. Sucky credit has gone from a minor annoyance to a pretty serious life issue. If you are letting your credit suffer for your company, you are doing it wrong. That sort of risk is precisely what investors are for. Working for a reduced salary, with pretty much zero job assurance, and bad or nonexistent bennies to begin with, and working nights and weekends, letting your personal and social life suffer, is punishment enough. If you get pressure to put more personal financial skin in the game, play good/bad cop with your spouse or life partner (ie use him/her as an ironclad limit on how far you can go towards financial armageddon)
> Think of it this way: had your company been successful, it almost certainly would have left you in a state where you'd be working for someone else for a couple years during your earnout. "Not working for someone else" was never really on the table.
Wow, I'd never really thought about it that way before. You're completely right, of course.
It's just rather depressing. Maybe I'll go re-read Rework.
You know, some personality types cannot help but be concerned with how they're perceived by others. They're hardwired that way. It's the classic misunderstanding between extraverts and introverts.
>People who don't care about other people's opinions aren't that common and aren't called extroverts.
Actually the definition of extraversion is deriving gratification from that which is outside the self, so I'd say it's actually introverts who are less likely to care what others think.
I would argue 99% of people care a great deal, whether they like to admit it or not. We are social creatures. Caring about these things (within some range) also gives a higher chance for reproductive success, so as you said, we are hard-wired to care.
Having been through shutting down my previous startup just a few months ago I can say that my experience mirrors this quite closely. Its scary and stressful at the time, but at the end of the day, nothing bad happened and nobody ridiculed us. In fact, everybody (including our investors - some of which are involved with us again) was quite positive and everybody sees it as a positive learning experience. And being able to say that we're on our second startup has been beneficial too.
There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
Oh yeah, definitely. There shouldn't be any mix of assets. You need to keep them separate if you're trying to make the legal case that they're separate.
S Corps are limited liability corporations. Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S, and (b) it's easier to grant employees equity in an S than an LLC.
It's not as sketchy as it used to be, due to some rules changes in the last few years.
As a one-person S-Corp, you run payroll and you are your own employee. You can set your salary, and you can also pay yourself in distributions. Salary is subject to FICA, distributions are not. Both are subject to income tax.
When you pay yourself salary, your "personal" side pays its half of the FICA, and your "business" side pays the other. This is the same way a regular employer/employee relationship works (and why it "feels" like you are paying double FICA when you're self-employed; it's because you are both the employee and the employer).
It used to be that you could severely limit your salary, and pay yourself the bulk of your income through distributions, and lower your tax bill by having lower FICA costs.
These days, it is your responsibility to pay yourself a "reasonable salary", as in something you could reasonably defend during an audit. Once you have paid yourself a reasonable salary (which is subject to FICA), you can give yourself more money (revenue permitting :) ) in distributions.
Also, if your self-employment is part-time, you can pro-rate your salary to reflect that part-time employment.
It's also worth noting that as your business gets successful and long-term, you may want to increase your salary and pay into FICA so you can get a better social security payment when you retire. But still, if you analyze it in a spreadsheet, you'll see that social security, as an annuity, is a "bad deal" when you're paying both sides. (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)
> (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)
I agree with everything you say here, except this last sentence.
It would be true if the money were coming from a truly external source, but from an economic perspective, this is no different from a "normal" sales or income tax. As a result, it doesn't matter who is nominally paying it - the "real" payer (the incidence of the tax) depends on the relative elasticity of the supply and demand.
As it turns out, empirically, about 95% of the incidence of FICA (if I remember correctly) falls on the employee. In other words, it doesn't matter if the employer is nominally paying for half - they factored that in already when deciding how much to offer the employee when they hired him or her.
For many people reading this thread, Social Security is a bad deal no matter how you look at it - for many people reading this, it will be literally impossible to earn as much back from Social Security as they have paid in (assuming a vaguely realistic life expectancy).
(This is not a political statement, by the way - whether or not one believes that Social Security is good or bad depends on how much value one places on transferring a bit of wealth in order to guarantee a minimum income for the elderly. I just wanted to point out a part of the Social Security calculus that is easy to overlook.)
As I understand it, reasonable though your claimed salary might be, if you're making money on the difference between distros and salary (which stops being an issue at around the 100k point), you're filing returns with a big red audit flag on them. The tax savings probably aren't worth the heartache for a lot of people.
Not for nothing, but as an entrepreneur who has been in exactly the situation contemplated by this scheme: avoiding taxes by structuring your income as a "distribution" rather than salary is shady. I think it's unethical. People that don't happen to run S Corps don't get to do it. I'm prepared to lose the argument, so let me concede it in advance and avoid polluting the thread.
Well, as someone that quite likes the idea of things like social security and universal health care, I wholeheartedly agree that it's wrong to falsely deflate one's salary in an effort to avoid paying into FICA. But I guess it has never been argued to me that beyond the reasonable salary, it should be one's responsibility to pay excess profits as salary rather than distributions. I can't really find a good reason to hang my hat on. I think the entire reason S Corps exist are to encourage small businesses since we otherwise take on a lot of risk, no? Too bad that threads get polluted right when discussions get interesting. :-)
I agree with the analysis above, with one addition: a big reason to pay yourself more at any owners only profitable small business is to max out a contribution to a 'individual 401k', sep-ira, or similar. The rules vary, but if your 'salary' is in the $250k ballpark, you can contribute up to $51k in additional money to a tax deferred retirement plan. Just like a 401k, it grows tax free.
Most SS taxes are capped just above $100k, and if you own a tech company it's pretty hard to argue you salary should be below that, so the SS angle is limited. But tax free compounding on $51k/yr is a significant benefit.
Disclaimer: I am not an accountant, nor is my business set up as an S corp.
The way it works is this: you form an S corp, and as the owner you pay yourself dividends rather than straight income. That way you aren't taxed at normal income tax rates but instead at the capital gains rate. At the same time, because you are now an employee of the S corp you personally only pay half the social security tax, rather than the whole bit as you would as the owner of the LLC paying both the employer and employee portions (of course the corporation is still obligated to pay the employer contribution).
Accountants are of different minds on this, depending on their own taste for risk. The important question in an audit is being able to defend that the business is more than just you, IE: the income is legitimate dividends from the success of the business, and not just regular employment income masquerading as dividends. Again, consult an accountant - they really are worth the cost.
I think this is incorrect in two ways - you do still have to pay yourself salary, and dividends are taxed at normal income rates (due to pass-through) rather than capital gains rates. It's unfortunate that they are called dividends, because stock dividends are taxed at capital gains rates.
Curt - perhaps I could have written out explicitly "you still have to pay yourself a salary" but that was what I was trying to infer with my comment of "...because you are now an employee of the S corp..." I see you are also in Oregon, you might have better local advice for the parent poster. At a minimum, since you are both local to Portland you should meet up for a beer. ;-)
I think you're using incorrect terminology here. Dividends comprise capital that is distributed from a C Corp, and have a special taxation structure that is separate from ordinary income.
Josh - I see you are based in Portland (hello "neighbor!" - I'm about a 4 hour drive east from you). You'd probably be just as well off moving over the river to shed the Oregon state income tax (sorry Oregon, I love you but...). Setting up an LLC in either Oregon or Washington is trivial. Setting up an S or C corp in Washington (I've never done it in OR) is also really easy, but does involve more paperwork. Especially in the early days of a business, there are so many advantages to setting up an LLC that I'd be surprised if an accountant advised otherwise. Have a deep-pocketed investor ready to go? That's the only case where I can imagine that setting up a C corp from the beginning makes sense.
Respectfully, please don't delete posts. Edit in a warning at the top that you were wrong and realize it or something. People reading these conversations later now have no context, which is frustrating.
> But, I can’t imagine working for somebody else. I wish my wife understood that.
She's understood it long enough to let you pursue the dream of your life at great costs for her, maybe now it's time for you to do some sacrifice for her and go work for someone?
You're not the first one to have to do that and, you know, survive.
“I can’t go much longer without a paycheck. But, I can’t imagine working for somebody else. I wish my wife understood that.”
Change your perspective on this.
I’m a co-founder of a successful and growing business. I’ve got around $2M liquid and who knows what on paper. I’m decently rich headed for pretty damn rich. In the last week, I’ve changed light bulbs, picked up bugs with my hands (no tissue close, wanted to get it and call the bug guy before people saw it), swept the floors, took box trash out to the dumpster, cleaned some toilet stuff (will leave it there) and just generally served people on my team in any way I could. I find ways to do it because they are talented, could work anywhere and choose to work here. So I serve them. Also, I have deep relationships with them and I love them. I want to win with them.
From your words, I worry that you don’t understand the point of the game you are playing. If you want to run any successful team be it a business, a non-profit, a 5th grade little league ball club – you are servant in chief. Others exist in the world. You aren’t really ever by yourself or for yourself. Work on being and building a team. Make meaning and tie it to production. Start by being the best teammate you can be. Being an employee in an intense and well managed company is a good place to learn this skill.
To me the key point was this:
If you want to run any successful team…you are servant in chief.
Most managers completely miss the "servant in chief" bit.
Thank you. This was my sentiment but didn't comment on it. There are very few things in life that are only "one time only".
Build the cash reserves, get back on a stable financial ground and go ahead and try again.
Sometimes the myopic tendencies of these stories really drives the point of how self-absorbed one can get with this. Working for someone else likely means a nice office, nice chair, nice desk, nice computer and monitors and the ability to sit down for 8-9 hours a day and use your mind and likely a decent salary.
I think for the vast majority of people in the workforce that do don't software development, that's not surviving but thriving.
As your post seems to indicate, you're scared shitless right now and it seems like the entire world is coming to an end. Trust me, even if it really seems that way, it's not.
For now, grit your teeth and go through the bad stuff. Tell your wife. Be honest with her. No matter what, she's your wife for a reason- she'll support you through all of this. If you neglected your relationship with her a bit because of the startup thing, then she comes first now. Then tell your investors. Tell your employees. Tell whoever else you need to tell. Be honest, genuine and straightforward. The next few weeks are going to suck big time, but you'll get through them.
Once the big stuff is behind you, take a few weeks to breathe, if possible financially. You're coming to the end of a long, arduous journey, and that's always something hard to process. Try to find joy in the little things that you didn't have the time for during your founder mode. Have brunch with your wife. Go take a walk alone in the forest. Read a book. Take time to recover.
You will find another job. You don't realize this right now, but having run a startup for 2 years gives you more skills and experience than others have developed in a lifetime. If you have to take a job right away because of financial hardships, take something low stress (consulting/freelance could be a good choice, for the flexibility, although it can be hard to get started with no leads). Now is probably a bad time to do another startup. Also, you probably want to use this as a lesson to remember that you should always have ~6 months of expenditures in the bank that you NEVER touch precisely for situations like this one.
Don't worry about the investors. It's part of their job - you're not the first startup that they funded that failed, and you're not the last either. Be professional with them- if you want to do a startup again in the future they will remember your honesty and ethics more than the fact that your startup failed.
You ran a startup for 2 years. Solely by doing that, you've gone further on the path of entrepreneurship than 99.999% of people who call themselves "entrepreneurs" have. Take time to grieve, but also take time to see all that you have accomplished.
If you still feel depressed after a month or two, go talk to a professional therapist/psychiatrist. Sometimes we need a little external help.
I haven't started a company (yet!) and can't imagine what the OP is going through but reading this made me feel better :). I will definitely save this for future reference for when I do start (and more than likely fail) my first company. Thanks and cheers!
i thinks this piece of advice its cool in almost all of it.. but there are some pieces of it that i think sounds a little overoptimistic:
> she's your wife for a reason- she'll support you through all of this
Maybe not.. a lot of marriages brake because of financial bankrupcy.. but this guy will have to face it anyway.. it will depend of how much the materialistic/spiritual type she is and how much she love him.. this will be definetly a good proof of love from her, if she stands up with him... (but these sort of people are rare)
> they(investors) will remember your honesty and ethics more than the fact that your startup failed
I think it will be harder for him to raise funds later if he try to do it again some other time.. but nothing that will do things impossible for him.. also there are other ways (you know, companies existed before VC funding :)) .. but maybe this make his charisma and charm to raise even more money.. like superpowers that come from a mature characther
This guy need to face the truth no matter how hard its gonna be.. and i dont think trying to make things look better will help him much.. there are times life sucks, and this can be a proof of the strenght or weakness of our character..
Let me make it clear that you advices are very nice.. i was just spoting some overoptimism in some areas and i dont think in that particular case, this would help.. its reality time for him now.. time to take the red pill .. the blue pill will only make things worse..
Again, everything can serve for good in our experiences.. even, and specially the ones that are bad.. it needs a superior point of view to spot the good things from everything and make ourselves better.. but we have a lot of examples out there of people that just can't see the things that way.. and never "come back".. its important to know this and never be one of them..
Its the end of a war or its just the end of a battle in life?
> Maybe not.. a lot of marriages brake because of financial bankrupcy.. but this guy will have to face it anyway.. it will depend of how much the materialistic/spiritual type she is and how much she love him.. this will be definetly a good proof of love from her, if she stands up with him... (but these sort of people are rare)
Rare, but hopefully that's the case with her. A good person stands by their partner's side in times of trouble.
Reminder for people who are running startups and are in serious relationships: nothing should be a secret from your spouse/partner. Especially money.
Maybe they're supporting you so you can recycle every dollar of revenue back into the business. Maybe you're gambling your shared savings on the success of your venture. Maybe you've got a good financial position and your family will be safe no matter what.
It doesn't matter. Tell your spouse. Get their advice. You don't have to take it, but they are a valuable resource to you, someone you can trust to listen to you, keep your secrets and have a different perspective.
It should not come as a surprise to him/her that the shutdown is likely; the shock of "no, it's definitely over" should only be a small bump.
Then you can both live through it, and go on to the next thing you have to do.
THIS! I can't get behind oscarthegrouch who thought it was important to articulate the worst case scenarios in a case like this, because regardless the next steps are the same, but this advice is gold.
Dont get to this point and surprise your partner. She is as much your partner financially as your co-founder, treat her like that from day one.
This point cannot be stressed enough. If you hide stuff from your spouse about money, you're going down a real bad road. If your life at home is shaky, there is no way you are going to be able to lift a business successfully. The two cannot be siloed off from one another.
If your spouse / partner _doesn't_ want to have these conversations, you have larger problems. One signpost that my marriage was doomed was my wife's shock at the possibility the business might fail, and her refusal to discuss the possibility.
I've been there. I shut down my YC startup about 3 1/2 years ago. It was covered in the press more than my launch was! Shutting down was a huge weight off my mind - we weren't successful and nothing was going to make it so.
You raised money and have employees. Worry about the employees. Get them new jobs in great startups by actively going through your network and making sure they get new jobs that they'll love with teams they'll enjoy.
Dont' worry about the investors. They've lost money before. If you raised from non-professionals, then you may have to apologize. Mean it.
Tell your wife, obviously. You probably don't need to worry about money too much - now you can take a low-stress job at high pay and get back what you lost doing the startup.
Also, please feel free to reach out: paul@circleci.com
If you can run a startup, you're employable as a consultant to at least enough people to make ends meet. Reach out to your personal networks and try and stem the tide a bit.
We've all been there at some point in our life, there's nothing shameful about working for others to make ends meet. And even though most of us hate the idea of working for other people, at some points in life you have to put your ego and pride aside and just bite the bullet and do some damn work to pay the bills.
Life is long, failure is temporary. You didn't crash an airplane with 300 people in it, you just didn't succeed at business, an extremely common occurrence. Just keep truckin'.
(I realize OP is not the anonymous poster in question)
> Reach out to your personal networks and try and stem the tide a bit.
I'm not in OP's position at all, but I'm wondering what you mean by this. Would you just call/email people you know and ask if they need help with their business?
Generally, you'll end up connected to similar guys in your field after you've been running a startup for a while. You can reach out to them and say that you're offering XYZ consulting services in an effort to pseudo-bootstrap your company while still working on improving traction for your company. Most business people will actually really respect that, in fact.
It really depends on how well you've networked though. At the very least, you can start picking up random gigs on Craigslist or even contract work if you have any technical skills to at least keep money coming in in the short term so you can afford some breathing room.
There are all kinds of failed start-ups. As long as you know you didn't scam anyone and you can explain to your investors what happened and show accounting-books detailing how it all unfolded, and you learned something during this whole experience, you'll be alright in the long term. You can always try again. Maybe YCombinator(or GoogleVentures or whoever) should have a support-group for failed start-ups so people can share their experiences and know that they're not alone. Assuming you're in tech, investors know the gamble. I'm sure they know at least half the start-ups they invest in ultimately fail.
That said, one slightly harsh bit of advice:
>>But, I can’t imagine working for somebody else. I wish my wife understood that.
You need to get over that. Working for someone else(after a short break perhaps) is basically recharging your funds and your mind while you think about your next company. For all you know, you might run into your next co-founder in your new job. It's hard to think about the distant future when you're not even sure how to put food on the table tomorrow.
If you're in SF, LMK if you want a sounding board and someone to talk to in confidence. I'll buy you a beer. Help you get your head straight. eoghan@intercom.io
I sympathize with most of this post, but the one thing that I don't get is this line:
"I can’t go much longer without a paycheck. But, I can’t imagine working for somebody else. I wish my wife understood that."
If the author really is as down and out as he claims to be, I think somebody offering him good money to get his life back on track might be something that is welcome. He can always work for himself once things straighten out.
I came here to make this comment. I completely sympathized (and still do) for his position - but the luxury of something like "Not working for someone else" is the first to go when you are in dire straits. If you have debt, a home, and people who count on you, you take whatever work you can find. I'd call up Chuck E. Cheese and see if I could get my first job back before I would decide to just fail on my responsibilities.
When your luck is down, the room for luxury is low. "Not working for someone else" is a ridiculously large one, and your wife is not in the wrong for thinking similarly.
Still, to be constructive: Consider work that can sustain your responsibilities, albeit at a non-optimal rate. You founded a startup, a task that requires endlessly marketable skills in a growing field. It ended, and perhaps it ended poorly - but you can, and will, endure.
I'm there right now (minus the high-profile accelerator and funded part so I had even less success). It sucks. I'm exhausted. But I'm broke so I need a job. I can hack stuff together but I'm more of a junior level dev so not sure how attractive I am to a Silicon Valley startup.
I thought I knew what it took to be successful, so I quit my wall street job and drove out to San Francisco to JFDI. I even lived in my car for nine months to save money. It would be worth it once the business took off. It never did. So I started another one, which failed too. When you work non-stop, every waking hour for almost two years and fail at everything, you realize you don't have it all figured out. At all.
The scary part of failing is asking yourself, what the heck do I do now? And you don't know the answer.
Probably should have made this a throwaway. Oh well.
It's not as bad as you think. You're alive. You have your health (hopefully). Tomorrow you'll most likely be alive and still have your health. This is the starting point.
Those that love you came along for the ride. If you tried as hard as you could, and you took this gamble with their blessing, you do not owe them an apology -- although it wouldn't hurt to give one. They'll still love you and you'll still be making decisions together.
Debt is bad, but they don't throw you in jail for being in debt, at least in the states. Do some studying on dealing with creditors. It's a game like any other game, and it helps if you know the rules. Plenty of folks in debt who are living happy and fulfilled lives. It's not the end of the world.
As to whether you'll be viewed as a failure or not, this depends on your peers and your culture. I suggest you hang out with people who view this as a badge of honor. Life sucks enough without having friends who stomp on you while you're down.
Family is another matter. Can't pick your family. But you can set some ground rules for interacting with them. If you need money from them, be prepared to do things you wouldn't normally do. After all, it's only fair to let them drive a bit if you're needing their help.
It's nothing but a thing. It can be hugely disasterous, or it can be a slight bump in the road. The difference is all between your ears, inside your head. You get to decide how to view this part of your life -- great adventure continues or yet another failure. I suggest you choose wisely.
Speaking from experience, failure is essential to becoming a good entrepreneur. I've heard we learn more from failure than any other learning technique. At no time are you more present in this life when you are failing, of that I can personally assure you.
I applaud your ability to share your failure with others, even in an anonymous way. Wherever you go and whatever positive choices you make next will guide you to the thing you were meant to do.
About 18 months ago I was laid off from an executive position at a company I'd been with about 5 years. At the same time, I was trying to bootstrap a business on the side, I'm the sole breadwinner in our household, three little kids, and I had a house that was underwater that we couldn't sell due in large part to all the foreclosures in the area that were the competition. To make it worse, we had moved to a very remote, rural area for family reasons, so had two houses to cover, and zero job possibilities anywhere in the area. Eighteen months later, that side project has folded (which I'm ok with), the other house is sold, and I'm doing well consulting (and with minimal travel). Will your story 18 months from now be rosy and happy? I don't know, but I suspect if you are the kind that would take the risk to start up a business, you are the kind that will hustle to do whatever it takes to first reach a point of survival and then the road back to thriving.
How you deal with the process and its fallout will be a defining moment for you as a person. Be upfront, be honest, and don't worry to much. Life goes on. You're in the best place and time there ever existed to fail and move on.
The best advice I can give you is that the sky will clear the moment you absolve yourself of the responsibilities. You'll be a free, earning man again. Things will only look up, and very quickly the ideas will start flowing again.
Take your wife for a talk. Explain to her how it's going to be, and that you'll be looking for a job the moment you've turned off the lights. You will have some peace, comfort and certainty soon that will allow you to think clearly, and later on, establish a learning process of everything you've gone through.
Someone around these parts said that the most difficult part of being an entrepreneur is managing your own psychology. It's time you get a hold on yours and own the situation.
Here's one of the most important lessons I've learned about startup life:
There is a fundamental difference between being poor and being broke.
Being broke implies you don't have enough cash or expected cash flow to cover your debt - but it doesn't mean you haven't accumulated wealth. Being poor means you neither have cash nor wealth. The OP is simply broke, but not poor.
Knowledge from failing a business is (IMHO) one of the greatest, if not the greatest, ways to accumulate intelligence in business. That is extremely valuable.
"Knowledge from failing a business is (IMHO) one of the greatest, if not the greatest, ways to accumulate intelligence in business. That is extremely valuable."
I think what you're going to find out is letting go will actually be a huge relief. You're going to bumble around feeling like a worthless piece of shit for a few weeks and then ideas will start boiling over in your mind. Before you know it you'll be writing a business plan or prototyping something new and you'll be armed with this failure as a roadmap of what not to do. You sir will be a-ok.
PS. Not having any money at least once in your life is something everyone should go through. You'll be surprised at how well you eat and live when you thought you'd be homeless. You'll also realize how much bullshit you have in your house or services you pay for that you really don't need. Good luck - you won't need it.
Completely agree. It's amazing what we don't need and I'll expect you find your confidence in 12 months is through the roof. The shackles you thought were binding you are were actually made of sand.
So all the very best, and remember this will be an awesome war story for you to tell in the future.
Like you, I raised money, went through a top accelerator and had a wild ride that doomed in failure.
It's ok to be terrified. It's ok to hurt. Fear paralyzes. You will pull your socks up and do what you need to do. It'll hurt more than you know. You'll quickly separate your real friends from the rest. And then something amazing will happen, your life will go on.
The first thing you'll notice is how much of life you've missed while riding the startup "high life". Big things like love, family, reality will suddenly become clearer and no longer dimmed by the tinnitus of whatever TechStars derivative you've been through.
The next is that you're a hell of a lot wiser. You'll find a job and you'll start performing. You'll look like a legend because the pace and agility you learned to work at during your startup days will make you a rockstar anywhere you decide to put your talents to use.
Your performance will bring more money, and power (to a degree) than you've ever made before. You'll make up for lost time.
And then, like all of us, you'll hear the siren song of entrepreneurship beckon you out into the world again. You'll pick up the pieces and start anew.
It is hard to be where you are. Thankfully life does move forward.
In my case we had a couple million invested in the world changing idea. Saying we failed was very very hard. Hard to tell my friends, our industry partners and my parents.
What I did - was take a long walk to my favorite rock on the lake. And I sat there in the cold and watched birds fly and fish eat and the sky change. I cried tears of frustration and of grief, for the possibilities that wouldn't be.
I then went back the office and made a list of things we needed to do. In my case our investors saw it coming because we'd missed key milestones for additional funding. Our team was small and I'd been open with them about missing the milestones.
We negotiated out of our contracts and made our final payments. In our case our board had made it clear we needed "wind down money" in the bank and we had it.
It wasn't easy, not by a long shot. At the end I was drained. I took two months off. I slept, I prayed, I read and I journaled. You may not be able to do all of that, but give yourself a break.
What I wished I had was someone to talk to who understood what I was going through. Plenty of people fail in business, but not many have a lot of money backing it, a lot of people believing in it and you feel like you let them down. Take up the offers of help to talk in person. I'd be glad to sit and listen if you want. The good news is that the sun will rise tomorrow and it will be a new day. And while it won't feel great, you will get through all of this.
I interpreted it as being about his personal dept that he must've accumulated by not paying himself a salary. Which, yes, is alarming if not irresponsible (but perhaps understandable, I haven't been in this situation).
Those are bad investors. For anyone raising money and reading this: if an investor asks for a personal bond, do not take money from that investor. That is either an investor behaving badly, or an investor who doesn't understand the risk of startups and should not be investing in them.
It's interesting, currently my business (bootstrapped and small) is doing just fine. Profitable, making more than I used to working for someone else, and I'm STILL scared shitless most of the time. The wife and I want to build a house and have kids and that sort of thing, and it all scares me.
The really interesting thing though is that in general working for yourself is not much if any more risky than working for someone else. Sure if you are at Apple or Google it's unlikely they are going out of business, but companies big and small go bankrupt all the time. Layoffs happen all the time. That's the way things work. You just have to make yourself valuable and work hard. Especially in our business, if you are remotely competent it isn't hard to find work right now.
I really should find a way to feel less stressed. Things are mostly fine, and I know for a fact that I could get a job tomorrow if I wanted/needed to. "Failure" for me would likely mean taking a high paying dev job at a great company that I respect. I should just relax and do good work and hope for the best. It's hard though, and I see where the OP is coming from.
No point working all the time to accumulate all you can only to die early from a heart attack.
Working for someone else means you can go home and not think about work until tomorrow. And you can read a book and develop hobbies, learn to play an instrument, tend a garden and look after a pet.
I do not envy you. I have had to work very hard in the evenings to get out of sticky situations, and despite the romantic view of working for yourself, I like to go home and forget the day.
That's the interesting thing. I made more money than I've ever made last year while working fewer hours than I ever had. Things are going well for all intents and purposes, but building a house and having a kid or two is scary on many levels. Being responsible for yourself is pretty easy. Being responsible for a spouse adds a little bit to it. Being responsible for a kid on top of that (and having the spouse quit working to take care of it) adds significantly more.
Been there too. Here is the lesson to learn:
If you got funded and have to pay invoices, employees (including yourself), never hope for more investment. Shrink and - if necessary - finally close your business before (!!!!) you run out of money. This is true for startups, businesses, household budget, pocket money, girlfriends (hrmmm), etc.
Startup is a high risk, the statistical odds are against you. Investors know that. If they see you fail, they will not tell you, they will simply stop to invest (and may be think, you will go on to save their a...). Hope that you may find new investment means, you did not start looking early enough to know the odds.
I (we) were at the same position in 2001 when the internet bubble burst. I am happy to report, that our business needed heavy investment (like yours did) and it became clear to us, that there will be no more investment for internet business in the foreseeable future. So we did shut down with money on the bank, paid our debts, bought out our gadgets from the company and divided the money that we paid for the gadgets among the shareholders (us :o).
Both of us founders saw the startup as a business not as our baby. So we were able to look at it from a kind of outside perspective. This was not the reason why it failed, though, but it lifted us at eye level with the investors.
The way we handled it allowed us to book it as a very interesting experience. We were immediately able to look forward.
But, here is the positive side: You got investments (a lot even), you survived for 2 years, which is great. Now get together with your co-founders in a nice place, drink a bottle or two of good wine and analyze your mistakes.
Sorry to say this now that it is late for you. But next time ...
I'm a CTO and a serial entrepreneur, and i'm into this business since i was a kid. 6 years ago after a very intense splash in a huge famous company in US, I've decided to take a break, and fly to the Caribbean to open a sushi restaurant. My girlfriend is a successful F&B manager so i took all the suggestions I can handled from her, and opened it. After 12 months, was a complete failure. The first of my life. I was really scared to lose everything but just the time to close and open my eyes, solutions were there. Time and focus are very helpful. I didn't drop. I've found a re-start partner, took my girlfriend with me in business to advice and manage, changed style, and finally sold it to at least break even all the debts and have some vacation, ready to go back to the Internet. The break lasted 4 years at the end, and was the most important time of my life, looking at it from here now. The major growth of your soul. Keep the energy and focus, be sincere, and for sure something good is going to happen. And your second time is going to be ridiculous easier, trust me. Good luck.
Agreed. It's about priorities, if he values his family more than the comfort/luxury/whatever-it-may-be of self-employment then you do what you have to do; not saying it would be easy.
"We didn’t leave enough money in the bank to pay off our debt, so now we need to tell people we can’t pay. Are they going to come after me, or my house and my car? I’m broke and I’m scared."
Hoping the "well-known accelerator" knew their stuff and the company was structured appropriately so that's not an issue.
"Will [out investors] forgive us? Will any investor ever trust us again?"
These are professional investors putting money into an early stage startup, right? I'm certain they were aware going in that they might not get their money back. (And, in fact, that this was the most likely outcome.)
Seriously. I'm 32, and never had a "boss" per-se. I've had consulting clients, and I've been at a company before, but always on my own terms.
I recently started work with a part-time client in a more traditional arrangement and it's quite...trying. I had thought it'd be the opposite: someone else is running things, you just show up and get things done. If they make poor decisions, whatever, it's their money and time. In practise, I'm finding it extremely difficult to deal with. I'll stick it out because I said I would but it is not as pleasant as I had thought.
It's not a good thing, and I wish as a teen I had been subjected to higher work discipline. Yes, I know, I'm whining about first-world problems (while living in a third-world country).
I am not yet 32 and I have worked for companies as an employee. Also, when I was utterly broke I did freelance work on the side and different languages and skills. It helped me get another job in fact!
I think the important thing for me now is that at the end of the day I can go home and not really have to worry or think about work until tomorrow. If money was the most important thing in life (or I was deeply in debt again), I would be working all evening as well, but money isn't the most important thing. Time is. Time to read, time to play with my cats, time to reflect.
My know a few who work for themselves and they seem constantly restless and with worry about how to make ends meet when not enough work is coming in.
The idea of working for yourself seems romantic and "free" but it can be quite stressful, particularly with a family and children.
I was hoping it'd be like that: "Clock out" and then forget about things. Except it's not, and I have dreams revolving around exactly how to solve a certain problem. Maybe if I became a lumberjack I could rest at night.
I find the drive home is the time to unwind for that. It isn't a long drive but I try and force myself to forget it.
Of course, I might end up tinkering with stuff in the evening but I try and make it my own code, not works, to keep that separation. But mostly I will attempt to avoid computer "work".
I think if it gets too much I will become a gardener for the council and mow lawns. All that green is quite therapeutic, and you can see where you've been and where you've got to go on a lawn, so it is good.
It seems like you are the one who has the higher work discipline already, and that many people who find it trying to become a freelancer or entrepreneur should have been subjected to such an experience as a teen.
Being self-organized, selling solutions instead or just fulfilling a specific role (even if done excellent) is awesome!
It's the same with me. I can usually do it for about 3-4 months...and then the mis-management, ridiculous decisions, and the blame game (IE: I get blamed for a poor planning decision) gets to me and I want leave.
Now, I only work part-time for someone while my company is growing. It makes enough now to pay me and the other 2 founders a comfortable salary..but I can juggle both until my company gets too busy.
I would bet my arse that if Bill Gates woke up tomorrow in a world where he had no money and no options, he would go about getting a job wherever he could until he could get back to doing what he wanted to be doing.
Take some time to decompress. The winding down period is stressful and it seems you're already feeling the effects.
As many have mentioned you've only enriched your resume with this experience. Use it to find yourself work, your incubator network should be full of people looking to hire.
I've gone through this and it's stressful as all hell but you'll make it through. With your nose right up against it the problems seem much more formidable than they are in reality. Employees come first in terms of settling debts. Deal with vendors after that.
One point I'd really stress is that you should talk to people about it. Feel free to reach out (p@trickod.com)
I don't have any particular advice to give, but, assuming nothing improper happened here, if you gave it your best, there is nothing wrong with failure. Failure is part of the system. Your investors and employees realize that startups are a risky venture. There are plenty of jobs out there and your employees will land on their feet.
I have nothing but respect for startup founders who did their best and came up short. I hope that the experience you've gained serves you well throughout your career and one day you can look back and appreciate the experience. Good luck going forward.
Talk to your accelerator and your other investors (assuming they're typical startup investors), they'll have seen plenty of other startups fail and will be able to give you advice how to handle the situation.
They'll also know which of their other startups are hiring and should be able to setup introductions to help you and your employees get accelerated interviews, etc. to help with the transition.
A big first professional failure is like breaking up with your first girl/boyfriend - it feels like the entire world is ending. After you find out that it didn't, it can be wildly liberating because you won't really be scared of failure any more. I recommend a few massive fuckups in any career.
I've been having my business for 10 years - which almost died twice.
The business is not about you. Yes you are the founder but you are just part of the machination to make it work.
When the business fails, it's not a judgement on your character or your moral. Failure sucks. Tell the truth your employees ASAP. Deal with the fall out directly.
If you need to downgrade your lifestyle, do it. It is better than having the anxiety to put up with un-affordable lifestyle.
More importantly - don't be an ass to your wife. If you need to get a job, get a job. There's plenty of time to try again in the future.
What I am interested in is the thought process involved in balancing things like fund raising, paying one cofounder and not others to stretch it, when to pull back, etc.
Obviously, investors want the dev cofounder paid to get product out the door..
But I am more interested in the decision process...
Let me clarify.. certain small business industries have these accounting/financial tools to help determine decision trees such as pay off debt now or later, etc.
Is there a similar set of financial ratios/trends to assist in the above decision trees?
I don't know about his kind of tools, but I agree with you that doing business has rules to follow.
Cofounders should be paid if the company has received external investment already. Employees should be paid even if the company is not making money.
Looks like OP is very young, all he and his cofound concerned is about the product and market, etc., not including how to run a business. In business, cash flow is always the no. 1 concern. If there is not enough fund, don't hire, no lease. Based on my previous job experience, $1M cannot afford a team in office. $3M can only have 1 years expense. Startup's burn rate is super high. Founders need to have plan B in place. It is said, "Failed to plan is plan to fail".
Emotionally, it's hard to accept the pitfall from owing $1m to negative. But how about if you never had that $1m, was that going to feel better? It's all about expectation and planning.
So the most important thing is to learn what can be avoided from this lesson. A lot of people are helping him to get rid of fear on the emotional side. It's sad that I didn't see much help on the business side to help other failed companies as well. Emotion is temporarily. Closing out process is a must to go. But how to prevent the 90% of the failed companies to avoid the pain is more important.
A lot of people care about it, but I didn't see any experts helping outside the YC meetings, although here is YC extension forum.
We are smarter than this. Why do we accept this as a normal part of our industry. There are ways to avoid this, the anxiety, heart ache, and lack of dent in the universe.
Most debt dies with the company. Tax debt (especially employee payroll withholdings) is really the only kind of I know which carries on, along with any personal debts which won't get reimbursed (which I got burned by, on credit cards, several times).
It's all surprisingly easy to walk away from, at least in the US, and particularly with normal professional investors.
It happens. Tell your wife. Inform the board. Hire a lawyer to deal with the debts. Inform the employees, giving them some idea of severance and resources to transition elsewhere . Figure out how money you have left and do an orderly wind down. Send out rfps to see if anyone will buy all or part of the company. Then get a new job.
You really should look for a job. There's nothing wrong with it. Look at it as starting a consulting business with just 1 client, get to know your 'client' and start suggesting ways you can make more money together - then charge a cut to do so.
I'd say the best thing you can do is learn the lesson that you should have had a contingency plan for this situation. Particularly since failure is the most likely outcome of any startup. I know though, that only happens to the 'other' guys.
I don't have any advice to offer, but it's the best story/post that I've read about startups. I think is exactly what you have to read, before jumping into the startup wagon. Then, you're ready to go, if your gut can take it
Ha! Not to worry. I got myself 700k in the hole in the 2008 financial crisis trying to "do the right thing." Spent four years digging out of that mess in a situation where I had to run a company successfully at millions in revenue just to stay afloat. That is a hell of a lot worse than folding the company, and if I knew the hell it would take to dig out, I might have folded! But we're free and clear and making money now so it was worth it. This would be the fourth company I started. The previous three I went through the same thing you're talking about. Got to the point where I started to wonder if there was something wrong with me, or if I wasn't cut out to be an entrepreneur.
I know that feeling of strain and staring at the ceiling wondering if I'm going to survive. No way out. It sucks. That's entrepreneurship. That's why I'll never tell anyone to be in business for themselves. You have to really want it for the right reasons or you'll never be able to survive this kind of thing — it will break you. I've actually seen quite a lot of entrepreneurs get "broken" when things got super, super bad to deal with. It's overwhelming.
But, the way to deal with it is this: what is the TRUTH of the situation. What are the real FACTS? The truth is, it's not that bad. It's not like you're being chased by ruthless drug lords down a dark street. You're folding a business.
Whenever you find yourself afraid, find the fear, then find the truth. Keep working through those until you feel better. It actually works. If you stick to the facts, you'll get through it.
Also, dude, you need to keep pushing. Get yourself shut down with class, get honest with your wife, and you'll come out swinging. It might sound crazy now, but the average entrepreneur who makes it has a few of these under their belt!
Now is the time of your testing. How you behave when the shit hits the fan is the question of what kind of leader you'll find yourself to be, so don't let yourself down. Be calm, be brave, face fact, and dive in! It's time to learn as much as you can about what you did to get here and what you can do next time to avoid this outcome!
ummm... Didn't we invented a marvelous escape hatch called "aqui-hires" exactly for this situations? If you have even moderately connected investors, you should be able to get aqui-hired in a week or two, very likely sipping pina colada on a Caribbean beach to stretch out before you start the new job with giant bonus vesting schedule that beats any of your colleges. Plus you get to update your Linked-In profiles with "CEO & Founder of Fantastic Startup (Acquired by whatever)". There are no loosers in startup world anymore, AFAIK.
yeah, my thoughts echo what most other people said: just keep your eyes wide open and observant so you can use this experience for next time! e.g. keep a journal and write stuff down so you remember...
I was at a code review recently with several people who had clearly never been through a major failure such as a start up going under (i've been through several...) and the difference in our viewpoints was apparent to me. This is valuable experience you're getting.
1.) I hope you are over playing the despair part, but if you really feel that every sucks then you should speak a professional to help give you perspective. Seriously, your mental health matters.
2.) Create a list of everything you need to do, then start to work through it.
a.) Have a conversation with your wife. Inform her about what's happening, what issues you're facing, and ask her about her thoughts. Get on the same page, that way there are two of you working through this. What's her game plan? She'll likely have some action items that should go onto your list.
Get your emotions out, but then move on. I've been doing the startup thing for 14+ years and married for 8+. I cannot emphasize enough that you should not overburden your spouse. She's got a lot on her plate now, so get your emotions out once (if you're into that), then stay upbeat.
b.) Schedule a meeting with your investors. Have a set agenda, use a PowerPoint (or other presentation software) that outlines your current status, etc. Also, show that you are a professional by showing them you have a plan/budget/timeline to shutdown the business.
Your investors are professionals. They know that a large percent of early startups fail. What they will want from your is professionalism.
Also, ask for their input. What do they need you to do?
c.) Legal: Speak with your attorney (this can also be before #b). Get their input on your legal checklist.
You must shutdown the business correctly. Your attorney will be a big asset. Keep your meeting with them professional and focused. Don't waste time on emotions in this meeting.
d.) Schedule a team meeting and speak with your employees. Help them transition if you can. If you're overwhelmed, which it sounds like, then tell them you'll be happy to give glowing references. This is easy and will require minimal work on your part while keeping the relationship alive.
As with #a, don't overburden your employees with your emotions. Sorry, but complaints flow up, not down. They will have their own pressures, and your job as a manager is to help assuage their fears and help them see that everything will be ok.
e.) It sounds like you don't have kids. Yah! Seriously, grab a beer. This is so much easier without kids.
f.) Fill-in this list with input from everyone above plus your co-founders.
g.)It's only Tuesday. Get moving and this done before the weekend.
3.) Debt: To any first time founders, please allocate budget to shutting down a business. Experience matters here, and it's best practice to know your shutdown costs, to budget for them, and to have the professionalism to shut the business down when you have just enough money to close up shop. You should pay debts, invoices that are due, employee salaries, legal fees to shutdown, etc.
To the OP, create a list of assets/liabilities. If you can sell assets to pay for liabilities then do it. Be cool about who you owe money to. If these are other small businesses / startups, then try to make your debt whole.
* If your payables and debts are all in the company's name, nobody is coming for your house. The likelihood that your business was going to die before you could pay all your debts was priced into your contracts. If you have employees, pay them and get them off your books first; employee wages are, depending on the state you're in, the one likely exception to that rule.
* If they were in your name, well, that sucks, but still nobody is coming for your house. Your credit rating will probably absorb all the damage. I've had shitty credit all my life, so much so that it used to make it hard to get checking accounts (I'm not a deadbeat, I just don't have revolving credit, and do have billing disputes that I don't have time to resolve). Shitty credit is not that big of a deal. Just don't use credit.
* It sounds like your wife is right. The existence of startups isn't a guarantee that you'll never need to work for someone else again. The normal life cycle of a startup founder is, (1) work for someone else, (2) start company, (3) run company into ground, (4) goto 1. Think of it this way: had your company been successful, it almost certainly would have left you in a state where you'd be working for someone else for a couple years during your earnout. "Not working for someone else" was never really on the table.
* Getting a company funded and then running it is a resume plus. You won't have more trouble getting another job than you did getting the one you left to start this company.
* Your investors expected you to fail. The odds were always overwhelmingly that you would. The whole startup investment model is, put money into 10 companies, hope 1 succeeds. Your investors are professionals. Let their problems remain their problems.
* Are you going to get ridiculed for failing? Obviously, you're not an HN reader. You'd have gotten ridiculed for succeeding. Ridicule is the air we breathe. Why do you care?
* Most small companies start from nothing. That's good news, because "nothing" is an easy state to achieve. Give yourself a couple years, and then try again.