6 ms·

Startup Economics 101, or, How Long Until We’re Dead?

188 points by antongm 16y ago

gaganpalrecha 16y ago
nice post, unfortunately SF payroll tax is 1.5% over $150,000 in payroll, not $250k in payroll as mentioned in your article :( It's a racket and is one of the reasons Twitter and Zynga are threatening to leave SF if the city doesn't give them a break on the tax. But it hurts the little guys more. If you have 4 employees making $40k each you have to pay 1.5% of 160k, which is $2400 (that amounts to almost 2 months of office rent or 75% of one employees monthly salary).
- jbooth 16y ago
  Personally, I'd be willing to take a 1.5% paycut to work in SF instead of the Valley, because I can't stand suburban commutes. But that kind of reasoning is probably why I'm in NYC instead of out west to begin with. EDIT: Also, I'd suspect that the "1.5% on payrolls over 150k" only applies to the amount in overage, because that's the way most graduated taxes work. So it'd be 150 bucks on the 10k of overage in your 160k example.
  - antongm 16y ago
    Well, in NYC you have a 1.5% income tax, rather than corporate tax, which is almost worse in a way.
    - jbooth 16y ago
      Yeah, and that doesn't even bother me, because I love living here and wouldn't trade that 1.5% for a suburban commute. To start with, I don't have to own a car, so that alone probably puts me ahead on income (the cost of rent puts me right back behind again, though). I am still upset as a Red Sox fan that a bunch of that money went to subsidizing the new Yankee Stadium, though.
      - gaganpalrecha 16y ago
        but you could move to south san francisco, and have an easy bart commute and the company wouldn't have to pay any payroll tax.
  - gaganpalrecha 16y ago
    no, it's not on the overage. It's on the total amount.
- kbyers 16y ago
  The SF payroll tax limit is $250,000 now. It changed recently.
- timr 16y ago
  "It's a racket and is one of the reasons Twitter and Zynga are threatening to leave SF if the city doesn't give them a break on the tax." Lots of cities have payroll taxes, and they're not a "racket" -- it's the cost of doing business in a city. What's unusual about SF is that it has a law that considers gains on employee stock options as taxable pay, not that it has a payroll tax.
  - gaganpalrecha 16y ago
    well, if we were getting real services from it I wouldn't be as bothered by it.
    - timr 16y ago
      Yeah. It's a shame we don't get anything like clean water, sewage treatment, police protection, 24/7 fire response, trash pickup, recycling, public transit, street repair or parks in exchange for our taxes. What a scam.
kaib 16y ago
Salaries are hard. We are in a somewhat identical situation, seed funded 6 month old, and were grappling with salaries after we closed our seed round. We went with something slightly different but probably more appropriate for a Scandinavian or European country. Basically each founder has a fixed sum that they can cost the company each month. It's up to each founder to decide how they split that sum between salary, benefits and mandatory retirement schemes. The salary itself can vary by as much as 30-40% depending on how you compose your package. From my point of view, as the keeper of the cash, this makes burn rate planning manageable. All of us feel that the system is fair and we also feel we can optimize it for our own particular lifestyle. As for the actual sums we agreed on an equal split, with a slightly higher amount for the founder who had kids (that would be me).
- dotcoma 16y ago
  you guys must be Swedes :) (it sounds smart and well thought out)
  - kaib 16y ago
    Very close, the company is Finnish. That said I'm a Swedish-Finn. :)
    - dotcoma 16y ago
      I remember reading a long article it seems I never bookmarked, unfortunately, on how less likely it would have been for Linux to start and get traction in any other place, because of the ethos of community and cooperation which apparently is very strong in Finland (and Scandinavia - never been to Finland, Italian here :)
lolizbak 16y ago
A very good post by @asmartbear on the same subject : http://blog.asmartbear.com/death-clock.html http://blog.asmartbear.com/death-clock.html
- jacques_chester 16y ago
  I think that the Death Clock article is complementary, rather than an alternative. The OP post is essentially a laundry list of expenses that startups can expect to face. This is useful because it is easy to overlook something that will blow a hole in your cash. The Smart Bear post is a higher level look at tools for managing cashflow. Instead of checking the cashflow balance once per month, you can see almost immediately what's going on. Short feeback loops are the core of agility. The only danger I can see with the SB approach is a risk of overcorrecting to noise. The use of least-squares fitting helps, but mindfulness pays.
- rjrodger 16y ago
  ... which inspired me to hack up a memento mori for my own startup: http://startupdeathclock.com http://startupdeathclock.com
samratjp 16y ago
Great writeup! As I read it, it also reminded me of this poem "Dulce Et Decorum Est" - http://www.english.emory.edu/LostPoets/Dulce.html http://www.english.emory.edu/LostPoets/Dulce.html
- Chocobean 16y ago
  Yes, it's quite refreshing to see great literature quotes in a "technical" or "business" kind of blog post. His reference to Owen's poem is incorrect though: the phrase originates from one of Horace's Odes, which Owen is quoting from. In Owen's poem, the phrase was used ironically: it's about as sweet and proper to die for one's country (or startup) as mustard gas and dead horses stuck in the mud. Perhaps the irony is intended....?
Ryujindra 16y ago
You would think, with the big deal Obama is making about how we need to do everything we can to encourage more start ups, he would offer some kind of 2 year tax free grace period. I understand that we need to tax to some extant, but how much more likely do you think start ups would be to succeed if we didn't have to worry about taxes eating away our already limited money during the first most crucial steps?
- lsc 16y ago
  Personally, I think that when you are small and not very profitable, lowering the complexity of taxes would help you more than lowering the tax rate. Most taxes are on profit (or on income) and nearly all of them are graduated. Before you are making much money, you don't have to pay out much in taxes. However, tax complexity makes planning much more difficult. I've gotta include a tax person in my decision making process. Now, once you are big, this is no big deal, but as a smaller entity? this is kindof a big deal. And it's another huge risk factor. If I screw up and end up in massive debit to one of my vendors or a bank or something, worst case I can declare bankruptcy. If I screw up my taxes? There is no such escape route available. I know more than one person who will spend most of their career in debit to the IRS because they thought they could do their own small business taxes, and screwed it up. So yeah. for startups? I think complexity of taxes, ultimately, is a bigger deal than the tax rate. This reverses, I think, as the company becomes more profitable. Lower tax rates are going to make profitable businesses more profitable, so lower tax rates would increase the upside for any startup. But I think that reducing the complexity of the tax code would help those who are still teetering on the edge of profitability more than reducing the tax rate.
  - jbooth 16y ago
    This. The US has one of the highest on-paper corporate tax rates while having one of the lowest effective corporate tax rates that most companies actually pay. This is basically a regressive taxation system for business since small businesses don't do things like offshore accounts and tax havens, so they get stuck with the bill. Meanwhile we're incenting big business to spend more time on that BS than on producing good product. Unfortunately, nobody will be able to reform this because any amount of moving things around between line items will be branded as RAISING TAXES!!1one2, even if it's revenue neutral (just omit the balancing cuts and it's still OBAMA RAISING TAXES).
GBond 16y ago
> Two blog posts early on (one on NY vs. SF, and another about my time at Goldman Sachs) went viral and were what first put us on the map. To this day, people stop me when I’m wearing an AdGrok shirt and ask if I’m the guy from the blog. We’ve gotten meetings with major companies who might otherwise not return emails because of those posts. Pick a fight. Pinch a nerve. It was interesting to know that these blog posts had such a positive effect just by unearthing a controversy, something out of the 37Signals playbook. Hard to argue against free marketing despite potentially stepping on a few toes.
mmaunder 16y ago
Every dollar you bring in has a significant effect on your runway. While making a few K a month and making it early may be far from profit, it can change your runway from 12 months to 18 months and beyond. It can also determine if you get to call it "my" business or "the" business.
- dstein 16y ago
  It is a tremendous feeling to get to the break-even point and with it the realization that you can now work on your startup full-time for as long as you want.
johnrob 16y ago
What ranges of equity/salary compensation are offered these days? If one should be skeptical about an employee who wants mostly cash, how should founders react to someone preferring all equity?
- antongm 16y ago
  I'd be fine with it. I think later on when you've got dozens (or hundreds) of employees and a limited options pool, it might become unfeasible. But right now, I'd have no problem with paying an employee only equity. Even tiny companies like us have valuations that are, well, non-zero, so it's not like some employee can conspire to get founder equity status by simply not taking cash. Why, know someone who will take only equity? Send him/her our way if so..;)
  - johnrob 16y ago
    Don't know anyone at the moment, but I've always thought this could be an interesting alternative for a potential founder who has some savings (especially someone roadblocked by a partner search). I haven't heard of many people doing it though, and was curious what the reactions would be.
  - lsc 16y ago
    Are there legal problems with this? Don't you need to pay at least minimum wage? Or is that implied?
    - deleted 16y ago
      [deleted]
      - lsc 16y ago
        hm. I'm also not a lawyer or a tax professional, so I may have it completely wrong, and I should probably shut up. But my understanding was that if you owned equity in a company and you worked for that company, if the IRS looked at it, in nearly all cases you'd be ruled an employee.
grellas 16y ago
Be cautious about deferred fees in dealing with lawyers. These have their legitimate role in the world of startups but, as with any other form of "easy credit," they can wind up costing you far more in the long run than if you simply negotiate good rates or fixed fee amounts for work you have at hand. For example, this piece discusses fee deferrals up to $30K. How would this work? A typical deferred-fee deal provides that a startup will get corporate legal services of up to x amount that are deferred for some fixed time (say, 6 months) or until the company does its first funding at some minimum amount (say, $1 million), whichever comes first. In exchange, the startup gives the law firm a small piece of equity for the credit extension. If the startup fails in its business, the founders are not personally liable for the cost of the legal services and the law firm eats the loss (this is the credit risk it takes for which it gets equity in exchange). If the startup does not fail, the bill comes due in time and must be paid. Now, a few observations from one who has done such deals many times over from a lawyer perspective: 1. The deferred-fee deal is a beautiful fit for the type of go-for-broke, hope-to-massively-scale company that will depend heavily on VC funding. You team up with a few co-founders, set your company in motion, and let it fly. You get heavily diluted up front when the VC funding comes in at $5 million and up, the burn rate for the company is high, and you go all out with a prestige team to build that billion dollar company (or at least hundreds of millions). You hire a law firm that bills $500/hr and up even for green attorneys and that works in teams. A simple company formation is $5K and up; your convertible note round is $5K to $10K and up; your Series A round is $50K to $60K and up. And, if it all works, all this gets paid from VC money. If it flops, you owe nothing. In a way, then, this is a risk-free way as a founder to go for broke in launching an ambitious venture. 2. Now consider a bootstrap venture or an angel-funded venture where the founders delay outside funding until they can build a credible pre-money valuation in hopes of minimizing dilution. Unlike the VC-funded case, you will here want to be much more cautious about what the legal services will cost. In most such companies, it is easy to get through the first 6 months of the company's history (a typical deferral period) without coming anywhere close to spending $30K on a legal budget. Company formation can easily be done in the $2K-$3K range for the vast majority of such companies; bridge notes for $3K or so; Series A often for $5K to $10K. Maybe you also need Terms of Service and other miscellaneous items (e.g., trademark applications). Thus, if you add up all the typical legal needs of such a venture, you might get up to the $10K range in the normal case if you spend your money wisely. 3. The temptation, then, with a deferred-fee deal is to spend on legal matters with greater abandon given that you are using "easy credit." This made sense historically under the VC model. It makes less sense under the modern angel model and even less sense for a company that is going the purely bootstrap route. 4. When it comes to deferred-fee deals, then, it is important to count the real cost. It may be a good step for your company but make sure the fit is right for your venture. A decade ago, this was a near-ideal arrangement for most startups with quality founding teams. Today, it makes sense for some but probably not for most quality startups. 5. Bottom line: if a deferred-fee deal looks attractive, then, by all means do it. Just don't treat it as an axiomatic good. Like most easy-credit arrangements, the ultimate cost to your company (even if not to you personally) may be quite a bit higher than what it might otherwise be if you focus purely on the market cost of the services. I do find it ironic that this item is emphasized in a (nice) piece on watching your spending and that is what prompted me to comment. Do watch your dollars and especially when someone offers you something that seems to be all upside (when it is not).
markklarich 16y ago
This is my first post on Hacker News. Glad to join you guys and see that you're talking about finances. I'm an accountant who is also a tax and business lawyer, specializing in micro businesses and creative projects. Hopefully I can contribute to the discussion. This community is full of people who know how to hack code. I'd like to introduce the idea that it's possible to be equally creative with business entity design. Business laws and tax codes are just other types of codes, waiting to be hacked. Corporations are one way to organize and that structure is well-suited to mature businesses. But it's far from the best format for beginning creative enterprises. It seems to be widely accepted that start-ups need to be corporations to make the transitions smoother as more investors are added down the line. It's time to reconsider that. Start-ups have completely different needs than mature businesses and should not be strangled by all the baggage that comes with a corporation, in the name of 'making a smoother transition.' It is fairly simple to start with an organization that is NOT a corporation and, thereby, avoid payroll taxes. Possibly ALL taxes, depending on the structure and the source of cash. This is particularly true if you are going to give equity anyway. Do some research on entity choice. Examples might be a Limited Liability Company, Limited Liability Partnership (in some jurisdictions), Limited Partnership, Limited Liability Limited Partnership (also only in some jurisdictions), even go naked as as simple Partnership or Joint Venture. By the time you're big enough to go public, you'll be able to afford the lawyers you need to reorganize. And that will be the least of your concerns. In the meantime, pick a business structure that is well-suited to your current needs, and can even help with some of your current headaches, like salaries, taxes, and cash flow. So, yes, a good accountant will pay for themselves many times over. So will a good lawyer. Finding a good one is the real challenge.
- petercooper 16y ago
  With advice like that, I hope this isn't your last post here too. Welcome to HN! :-)
- donall 16y ago
  It seems like this post could usefully be expanded into a longer article. If you have the time, I would encourage you to write it.

188 points by antongm 16y ago

nice post, unfortunately SF payroll tax is 1.5% over $150,000 in payroll, not $250k in payroll as mentioned in your article :( It's a racket and is one of the reasons Twitter and Zynga are threatening to leave SF if the city doesn't give them a break on the tax. But it hurts the little guys more. If you have 4 employees making $40k each you have to pay 1.5% of 160k, which is $2400 (that amounts to almost 2 months of office rent or 75% of one employees monthly salary).

jbooth 16y ago
Personally, I'd be willing to take a 1.5% paycut to work in SF instead of the Valley, because I can't stand suburban commutes. But that kind of reasoning is probably why I'm in NYC instead of out west to begin with. EDIT: Also, I'd suspect that the "1.5% on payrolls over 150k" only applies to the amount in overage, because that's the way most graduated taxes work. So it'd be 150 bucks on the 10k of overage in your 160k example.
- antongm 16y ago
  Well, in NYC you have a 1.5% income tax, rather than corporate tax, which is almost worse in a way.
  - jbooth 16y ago
    Yeah, and that doesn't even bother me, because I love living here and wouldn't trade that 1.5% for a suburban commute. To start with, I don't have to own a car, so that alone probably puts me ahead on income (the cost of rent puts me right back behind again, though). I am still upset as a Red Sox fan that a bunch of that money went to subsidizing the new Yankee Stadium, though.
    - gaganpalrecha 16y ago
      but you could move to south san francisco, and have an easy bart commute and the company wouldn't have to pay any payroll tax.
- gaganpalrecha 16y ago
  no, it's not on the overage. It's on the total amount.
kbyers 16y ago
The SF payroll tax limit is $250,000 now. It changed recently.
timr 16y ago
"It's a racket and is one of the reasons Twitter and Zynga are threatening to leave SF if the city doesn't give them a break on the tax." Lots of cities have payroll taxes, and they're not a "racket" -- it's the cost of doing business in a city. What's unusual about SF is that it has a law that considers gains on employee stock options as taxable pay, not that it has a payroll tax.
- gaganpalrecha 16y ago
  well, if we were getting real services from it I wouldn't be as bothered by it.
  - timr 16y ago
    Yeah. It's a shame we don't get anything like clean water, sewage treatment, police protection, 24/7 fire response, trash pickup, recycling, public transit, street repair or parks in exchange for our taxes. What a scam.

kaib 16y ago

Salaries are hard. We are in a somewhat identical situation, seed funded 6 month old, and were grappling with salaries after we closed our seed round. We went with something slightly different but probably more appropriate for a Scandinavian or European country. Basically each founder has a fixed sum that they can cost the company each month. It's up to each founder to decide how they split that sum between salary, benefits and mandatory retirement schemes. The salary itself can vary by as much as 30-40% depending on how you compose your package. From my point of view, as the keeper of the cash, this makes burn rate planning manageable. All of us feel that the system is fair and we also feel we can optimize it for our own particular lifestyle. As for the actual sums we agreed on an equal split, with a slightly higher amount for the founder who had kids (that would be me).

dotcoma 16y ago
you guys must be Swedes :) (it sounds smart and well thought out)
- kaib 16y ago
  Very close, the company is Finnish. That said I'm a Swedish-Finn. :)
  - dotcoma 16y ago
    I remember reading a long article it seems I never bookmarked, unfortunately, on how less likely it would have been for Linux to start and get traction in any other place, because of the ethos of community and cooperation which apparently is very strong in Finland (and Scandinavia - never been to Finland, Italian here :)

lolizbak 16y ago

A very good post by @asmartbear on the same subject : http://blog.asmartbear.com/death-clock.html http://blog.asmartbear.com/death-clock.html

jacques_chester 16y ago
I think that the Death Clock article is complementary, rather than an alternative. The OP post is essentially a laundry list of expenses that startups can expect to face. This is useful because it is easy to overlook something that will blow a hole in your cash. The Smart Bear post is a higher level look at tools for managing cashflow. Instead of checking the cashflow balance once per month, you can see almost immediately what's going on. Short feeback loops are the core of agility. The only danger I can see with the SB approach is a risk of overcorrecting to noise. The use of least-squares fitting helps, but mindfulness pays.
rjrodger 16y ago
... which inspired me to hack up a memento mori for my own startup: http://startupdeathclock.com http://startupdeathclock.com

samratjp 16y ago

Great writeup! As I read it, it also reminded me of this poem "Dulce Et Decorum Est" - http://www.english.emory.edu/LostPoets/Dulce.html http://www.english.emory.edu/LostPoets/Dulce.html

Chocobean 16y ago
Yes, it's quite refreshing to see great literature quotes in a "technical" or "business" kind of blog post. His reference to Owen's poem is incorrect though: the phrase originates from one of Horace's Odes, which Owen is quoting from. In Owen's poem, the phrase was used ironically: it's about as sweet and proper to die for one's country (or startup) as mustard gas and dead horses stuck in the mud. Perhaps the irony is intended....?

Ryujindra 16y ago

You would think, with the big deal Obama is making about how we need to do everything we can to encourage more start ups, he would offer some kind of 2 year tax free grace period. I understand that we need to tax to some extant, but how much more likely do you think start ups would be to succeed if we didn't have to worry about taxes eating away our already limited money during the first most crucial steps?

lsc 16y ago
Personally, I think that when you are small and not very profitable, lowering the complexity of taxes would help you more than lowering the tax rate. Most taxes are on profit (or on income) and nearly all of them are graduated. Before you are making much money, you don't have to pay out much in taxes. However, tax complexity makes planning much more difficult. I've gotta include a tax person in my decision making process. Now, once you are big, this is no big deal, but as a smaller entity? this is kindof a big deal. And it's another huge risk factor. If I screw up and end up in massive debit to one of my vendors or a bank or something, worst case I can declare bankruptcy. If I screw up my taxes? There is no such escape route available. I know more than one person who will spend most of their career in debit to the IRS because they thought they could do their own small business taxes, and screwed it up. So yeah. for startups? I think complexity of taxes, ultimately, is a bigger deal than the tax rate. This reverses, I think, as the company becomes more profitable. Lower tax rates are going to make profitable businesses more profitable, so lower tax rates would increase the upside for any startup. But I think that reducing the complexity of the tax code would help those who are still teetering on the edge of profitability more than reducing the tax rate.
- jbooth 16y ago
  This. The US has one of the highest on-paper corporate tax rates while having one of the lowest effective corporate tax rates that most companies actually pay. This is basically a regressive taxation system for business since small businesses don't do things like offshore accounts and tax havens, so they get stuck with the bill. Meanwhile we're incenting big business to spend more time on that BS than on producing good product. Unfortunately, nobody will be able to reform this because any amount of moving things around between line items will be branded as RAISING TAXES!!1one2, even if it's revenue neutral (just omit the balancing cuts and it's still OBAMA RAISING TAXES).

GBond 16y ago

> Two blog posts early on (one on NY vs. SF, and another about my time at Goldman Sachs) went viral and were what first put us on the map. To this day, people stop me when I’m wearing an AdGrok shirt and ask if I’m the guy from the blog. We’ve gotten meetings with major companies who might otherwise not return emails because of those posts. Pick a fight. Pinch a nerve. It was interesting to know that these blog posts had such a positive effect just by unearthing a controversy, something out of the 37Signals playbook. Hard to argue against free marketing despite potentially stepping on a few toes.

mmaunder 16y ago

Every dollar you bring in has a significant effect on your runway. While making a few K a month and making it early may be far from profit, it can change your runway from 12 months to 18 months and beyond. It can also determine if you get to call it "my" business or "the" business.

dstein 16y ago
It is a tremendous feeling to get to the break-even point and with it the realization that you can now work on your startup full-time for as long as you want.

johnrob 16y ago

What ranges of equity/salary compensation are offered these days? If one should be skeptical about an employee who wants mostly cash, how should founders react to someone preferring all equity?

antongm 16y ago
I'd be fine with it. I think later on when you've got dozens (or hundreds) of employees and a limited options pool, it might become unfeasible. But right now, I'd have no problem with paying an employee only equity. Even tiny companies like us have valuations that are, well, non-zero, so it's not like some employee can conspire to get founder equity status by simply not taking cash. Why, know someone who will take only equity? Send him/her our way if so..;)
- johnrob 16y ago
  Don't know anyone at the moment, but I've always thought this could be an interesting alternative for a potential founder who has some savings (especially someone roadblocked by a partner search). I haven't heard of many people doing it though, and was curious what the reactions would be.
- lsc 16y ago
  Are there legal problems with this? Don't you need to pay at least minimum wage? Or is that implied?
  - deleted 16y ago
    [deleted]
    - lsc 16y ago
      hm. I'm also not a lawyer or a tax professional, so I may have it completely wrong, and I should probably shut up. But my understanding was that if you owned equity in a company and you worked for that company, if the IRS looked at it, in nearly all cases you'd be ruled an employee.

grellas 16y ago

Be cautious about deferred fees in dealing with lawyers. These have their legitimate role in the world of startups but, as with any other form of "easy credit," they can wind up costing you far more in the long run than if you simply negotiate good rates or fixed fee amounts for work you have at hand. For example, this piece discusses fee deferrals up to $30K. How would this work? A typical deferred-fee deal provides that a startup will get corporate legal services of up to x amount that are deferred for some fixed time (say, 6 months) or until the company does its first funding at some minimum amount (say, $1 million), whichever comes first. In exchange, the startup gives the law firm a small piece of equity for the credit extension. If the startup fails in its business, the founders are not personally liable for the cost of the legal services and the law firm eats the loss (this is the credit risk it takes for which it gets equity in exchange). If the startup does not fail, the bill comes due in time and must be paid. Now, a few observations from one who has done such deals many times over from a lawyer perspective: 1. The deferred-fee deal is a beautiful fit for the type of go-for-broke, hope-to-massively-scale company that will depend heavily on VC funding. You team up with a few co-founders, set your company in motion, and let it fly. You get heavily diluted up front when the VC funding comes in at $5 million and up, the burn rate for the company is high, and you go all out with a prestige team to build that billion dollar company (or at least hundreds of millions). You hire a law firm that bills $500/hr and up even for green attorneys and that works in teams. A simple company formation is $5K and up; your convertible note round is $5K to $10K and up; your Series A round is $50K to $60K and up. And, if it all works, all this gets paid from VC money. If it flops, you owe nothing. In a way, then, this is a risk-free way as a founder to go for broke in launching an ambitious venture. 2. Now consider a bootstrap venture or an angel-funded venture where the founders delay outside funding until they can build a credible pre-money valuation in hopes of minimizing dilution. Unlike the VC-funded case, you will here want to be much more cautious about what the legal services will cost. In most such companies, it is easy to get through the first 6 months of the company's history (a typical deferral period) without coming anywhere close to spending $30K on a legal budget. Company formation can easily be done in the $2K-$3K range for the vast majority of such companies; bridge notes for $3K or so; Series A often for $5K to $10K. Maybe you also need Terms of Service and other miscellaneous items (e.g., trademark applications). Thus, if you add up all the typical legal needs of such a venture, you might get up to the $10K range in the normal case if you spend your money wisely. 3. The temptation, then, with a deferred-fee deal is to spend on legal matters with greater abandon given that you are using "easy credit." This made sense historically under the VC model. It makes less sense under the modern angel model and even less sense for a company that is going the purely bootstrap route. 4. When it comes to deferred-fee deals, then, it is important to count the real cost. It may be a good step for your company but make sure the fit is right for your venture. A decade ago, this was a near-ideal arrangement for most startups with quality founding teams. Today, it makes sense for some but probably not for most quality startups. 5. Bottom line: if a deferred-fee deal looks attractive, then, by all means do it. Just don't treat it as an axiomatic good. Like most easy-credit arrangements, the ultimate cost to your company (even if not to you personally) may be quite a bit higher than what it might otherwise be if you focus purely on the market cost of the services. I do find it ironic that this item is emphasized in a (nice) piece on watching your spending and that is what prompted me to comment. Do watch your dollars and especially when someone offers you something that seems to be all upside (when it is not).

markklarich 16y ago

This is my first post on Hacker News. Glad to join you guys and see that you're talking about finances. I'm an accountant who is also a tax and business lawyer, specializing in micro businesses and creative projects. Hopefully I can contribute to the discussion. This community is full of people who know how to hack code. I'd like to introduce the idea that it's possible to be equally creative with business entity design. Business laws and tax codes are just other types of codes, waiting to be hacked. Corporations are one way to organize and that structure is well-suited to mature businesses. But it's far from the best format for beginning creative enterprises. It seems to be widely accepted that start-ups need to be corporations to make the transitions smoother as more investors are added down the line. It's time to reconsider that. Start-ups have completely different needs than mature businesses and should not be strangled by all the baggage that comes with a corporation, in the name of 'making a smoother transition.' It is fairly simple to start with an organization that is NOT a corporation and, thereby, avoid payroll taxes. Possibly ALL taxes, depending on the structure and the source of cash. This is particularly true if you are going to give equity anyway. Do some research on entity choice. Examples might be a Limited Liability Company, Limited Liability Partnership (in some jurisdictions), Limited Partnership, Limited Liability Limited Partnership (also only in some jurisdictions), even go naked as as simple Partnership or Joint Venture. By the time you're big enough to go public, you'll be able to afford the lawyers you need to reorganize. And that will be the least of your concerns. In the meantime, pick a business structure that is well-suited to your current needs, and can even help with some of your current headaches, like salaries, taxes, and cash flow. So, yes, a good accountant will pay for themselves many times over. So will a good lawyer. Finding a good one is the real challenge.

petercooper 16y ago
With advice like that, I hope this isn't your last post here too. Welcome to HN! :-)
donall 16y ago
It seems like this post could usefully be expanded into a longer article. If you have the time, I would encourage you to write it.