4 ms·

I think what people often blissfully miss about founder comp is that the business literally supports the founder's entire life. Everything is a business expense

by dcow 4y ago

I think what people often blissfully miss about founder comp is that the business literally supports the founder's entire life. Everything is a business expense. Pay yourself 50k as a little bonus and run almost everything through the business, because if you don't survive, neither does the business. You think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year living humbly? Think again. IDK, I always thought this part of the narrative was rather misleading. EDIT: I'm not a tax person, obviously people aren't being illegal and dishonest. It's just smart to write off everything possible in a founder's life as a business expense. Maybe housing or this or that doesn't qualify where you live? Great that's what the minimal salary is for. Everything else goes on the company card. 2nd EDIT: I don't really understand why everyone is so cagey whenever this topic comes up. This isn't news. The IRS isn't reading this saying "gosh darn they figured out a new loophole". The laws are clearly spelled out, it's up to you to apply them to your situation. Remember, tax evasion is illegal. But minimizing tax liability is 100% okay and literally the name of the game. Otherwise, we wouldn't have tax breaks in the first place.

mousetree 4y ago
In what kind of startups is this happening in?! Edit: in our early days, if one of the co-founders did this, we definitely would've parted ways.
- dcow 4y ago
  The tax-conscious kind.
- whoknew1122 4y ago
  Every startup I've worked in.
- ericghildyal 4y ago
  Agree completely here! When we were getting everything up and running, we were making decisions about which SaaS platforms were worth our money. Having the company pay for something personally never once crossed my mind.
- hn_throwaway_99 4y ago
  I've also seen cases where pretty well-funded startups (and, honestly, not just startups, I've also seen this with large public companies) have tons of expenses flow through a founder's/upper level exec's personal credit card. The expenses are all legit, but this results in at minimum multi tens of thousands of dollars in credit card bonus points accruing to the exec. Will let you decide how ethical that is (or not). After all, many/most companies allow their employees to keep points earned for business travel. But it's one thing for an employee to keep bonus points for expenses they themselves incurred, which is very different, I think, than putting tons of corporate-wide business expenses through one person's card.
  - merely-unlikely 4y ago
    As a counterpoint, the founder is effectively providing financing via revolving credit line to the co in this scenario (which the consumer bank issuing the card might not appreciate, but that’s another topic). You mention well funded startups but it’s also common among small businesses for the owner to use personal credit cards (at their own risk) when the business is having cash flow issues.
- catsarebetter 4y ago
  Yeah I interviewed at a recruiting startup and the founder was writing off his brand new sports BMW and at the time I was like omg that's so cool and now I'm like omg that's so shady
axg11 4y ago
How many founders are claiming rent as a business expense? Granted, founders are able to expense a lot of things that employees are not.
si1entstill 4y ago
I this true? Wouldn't the IRS have something to say about apartments being classified as a business expense when it is used as housing in addition to "office space?"
- dcow 4y ago
  Rent may be the only thing the salary goes towards.
JumpCrisscross 4y ago
> think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year This is tax fraud. More realistic: cell phone bills, car expenses and home internet.
- moffkalast 4y ago
  Founders can have a little tax fraud, as a treat.
- dcow 4y ago
  It all really depends on your situation and context. Does your company have an office yet? If not it's probably the founder's residence. I've heard of apartments listed as offices in very early days. It's not about committing fraud, it's about working with what you've got. But for sure paying founders a low salary and running everything through the business is a tax-conscious strategy to minimize overall expenses.
  - gnicholas 4y ago
    The rules around home offices are very strict — it has to be a physical space that is used exclusively for work purposes. Even if it's a guest bedroom that is used mostly for work, but also occasional guests, then it doesn't qualify. That doesn't mean you'd necessarily get caught, but it does mean that it is not allowed. And if you tried to claim your entire residence, that would definitely not fly, and would be much more likely to be found out by tax authorities.
    - jrochkind1 4y ago
      I believe you also have to be self-employed now. Which possibly some but not all founders would qualify as.
      - jefftk 4y ago
        Yes: there's a weird temporary limitation on this until 2025. The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. https://www.irs.gov/newsroom/irs-reminds-taxpayers-of-the-home-office-deduction-rules-during-small-business-week https://www.irs.gov/newsroom/irs-reminds-taxpayers-of-the-ho...
paxys 4y ago
That's...not how it works. You can expense cell phone bills and lunches, sure, but VCs aren't paying for your fancy apartment. > EDIT: I'm not a tax person Most non-tech discussions on forums like this one should start and end with this disclaimer. Watching people here regularly talk about topics like law, "money laundering", write-offs and tax shelters is as hilarious and disconnected from reality as a hacking scene from CSI.
- dcow 4y ago
  Ultimately, VCs are paying for your fancy apartment. They're just paying more the more expensive your personal life is. I wouldn't dismiss the obviously aligned incentives here that encourage minimization of capital expenditure for business entities, especially in the USA. I'm making no moral or legal judgements, just commenting based on what I've encountered and witnessed. I'm not a founder and never consulted anybody with legal qualifications regarding this matter either in any specific instance. But, in my anecdotal experience, there is a rather broad spectrum of contexts and interpretations on how to do what's best for you and the business in your specific situation. On the flip side, it's not a big conspiracy, in the USA we heavily subsidize the pursuit of new enterprise. And the law reflects that. Smart people and successful businesses minimize their tax liability.
  - sushid 4y ago
    I don't understand your point. Of course at the end of the day VCs are paying for everything in the sense that they funded you, but there's a clear distinction between personal expenses (which come out of your salary) and business expenses (which you charge your business CC on). Of course you wouldn't have fancy VC dinner on your personal dime but if you're meeting VCs to raise a round, talking to a potential customer, etc., those are legitimate business expenses. No VC is going to be paying for your rent or your car lease, which is what you implied above. That's patently false.
    - dcow 4y ago
      You say it’s patently false and yet here I am saying I’ve seen startups own houses and cars. Maybe your and their tax accountants would disagree, but that’s a different topic. My point is simply that the low founder salaries are not because the founders are being particularly frugal or living humbly. The low salaries exist simply to pay for the things that the business’ accountant can’t expense. In every respect, the founder lives their business.
agrippanux 4y ago
One thing that can fly under the radar is when a founder uses their personal credit card for things like social media ad spend, and then gets reimbursed by the company. It's a very easy way to rack up tens to hundreds of thousands of dollars on a credit card which equals tons of points for things like travel, electronics purchases, gift cards, etc.
tensor 4y ago
Yeah no, this is bullshit and won't pass tax inspection. I founded and exited a company and yes I did live humbly until we actually managed a significant raise. Even then I still took a low salary. I only expensed things that were actually company related.
rdli 4y ago
In the short-term this might work, but if you're trying to build a company that grows, then it doesn't work so well, because other people you hire will ... want the same thing. If you expense your cell phone bill every month, then it's reasonable for other employees to expect the same, if they're also using it for work. Better to get the board to sign off on a slightly higher salary to offset these expenses, IMO.
MangoCoffee 4y ago
IRS just got their funding to hire more people. I'm pretty sure what used to be "not really look at" will be under microscope.
aerosmile 4y ago
This is how fake news happens. I really wish we all took a bit more time to research things before we publish them, because I guarantee you there will be more people today running around and sharing this exact same fake news about founders living in apartments paid for by their startups.
vecter 4y ago
> You think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year living humbly? Think again. IDK, I always thought this part of the narrative was rather misleading. In what situation would a founder have a company with meaningful investor backing and not use that money to pay for an office for employees and instead use it to pay for their rent? The tone and insinuation of your message is that founders pay themselves $50k/year but then splurge excessively using company funds on "fancy SF and NYC apartments" (which, depending on how fancy you mean, could go for $10-2k/month), which would almost certainly qualify as both tax fraud and fraud against the company. Your edit doesn't really do anything to alleviate the messaging, because you basically say (a) founders often commit fraud (b) ok maybe not, but I'm not erasing my earlier statement. FWIW when I started a company in SF in 2012, my cofounders and I did indeed pay ourselves $50k/year and pretty much 100% of that money after taxes went to rent and living costs (maybe saved $5k/year, I wasn't keeping track that closely). This was after paying ourselves $0 for a while of course. We did not live in fancy apartments or use a penny of company funds to expense rent or any other personal living costs. In fact, even after we raised $35m for our company, we still only paid ourselves $90k for another couple years.
lemax 4y ago
Writing off parts of your rent as a founder or business owner is perfectly ok with the IRS. Such a space needs to have "regular and exclusive use" for running your business and be your principle place of business (i.e. you do not maintain an office outside of your home). In my experience CPAs consider it reasonable to take the square footage of the dedicated office area and divide it by the total square footage of your home and deduct that much from your rent. https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction https://www.irs.gov/businesses/small-businesses-self-employe...
triceratops 4y ago
Relevant Seinfeld: https://www.youtube.com/watch?v=XEL65gywwHQ https://www.youtube.com/watch?v=XEL65gywwHQ

by dcow 4y ago

mousetree 4y ago

In what kind of startups is this happening in?! Edit: in our early days, if one of the co-founders did this, we definitely would've parted ways.

dcow 4y ago
The tax-conscious kind.
whoknew1122 4y ago
Every startup I've worked in.
ericghildyal 4y ago
Agree completely here! When we were getting everything up and running, we were making decisions about which SaaS platforms were worth our money. Having the company pay for something personally never once crossed my mind.
hn_throwaway_99 4y ago
I've also seen cases where pretty well-funded startups (and, honestly, not just startups, I've also seen this with large public companies) have tons of expenses flow through a founder's/upper level exec's personal credit card. The expenses are all legit, but this results in at minimum multi tens of thousands of dollars in credit card bonus points accruing to the exec. Will let you decide how ethical that is (or not). After all, many/most companies allow their employees to keep points earned for business travel. But it's one thing for an employee to keep bonus points for expenses they themselves incurred, which is very different, I think, than putting tons of corporate-wide business expenses through one person's card.
- merely-unlikely 4y ago
  As a counterpoint, the founder is effectively providing financing via revolving credit line to the co in this scenario (which the consumer bank issuing the card might not appreciate, but that’s another topic). You mention well funded startups but it’s also common among small businesses for the owner to use personal credit cards (at their own risk) when the business is having cash flow issues.
catsarebetter 4y ago
Yeah I interviewed at a recruiting startup and the founder was writing off his brand new sports BMW and at the time I was like omg that's so cool and now I'm like omg that's so shady

axg11 4y ago

How many founders are claiming rent as a business expense? Granted, founders are able to expense a lot of things that employees are not.

si1entstill 4y ago

I this true? Wouldn't the IRS have something to say about apartments being classified as a business expense when it is used as housing in addition to "office space?"

dcow 4y ago
Rent may be the only thing the salary goes towards.

JumpCrisscross 4y ago

> think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year This is tax fraud. More realistic: cell phone bills, car expenses and home internet.

moffkalast 4y ago
Founders can have a little tax fraud, as a treat.
dcow 4y ago
It all really depends on your situation and context. Does your company have an office yet? If not it's probably the founder's residence. I've heard of apartments listed as offices in very early days. It's not about committing fraud, it's about working with what you've got. But for sure paying founders a low salary and running everything through the business is a tax-conscious strategy to minimize overall expenses.
- gnicholas 4y ago
  The rules around home offices are very strict — it has to be a physical space that is used exclusively for work purposes. Even if it's a guest bedroom that is used mostly for work, but also occasional guests, then it doesn't qualify. That doesn't mean you'd necessarily get caught, but it does mean that it is not allowed. And if you tried to claim your entire residence, that would definitely not fly, and would be much more likely to be found out by tax authorities.
  - jrochkind1 4y ago
    I believe you also have to be self-employed now. Which possibly some but not all founders would qualify as.
    - jefftk 4y ago
      Yes: there's a weird temporary limitation on this until 2025. The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. https://www.irs.gov/newsroom/irs-reminds-taxpayers-of-the-home-office-deduction-rules-during-small-business-week https://www.irs.gov/newsroom/irs-reminds-taxpayers-of-the-ho...

paxys 4y ago

That's...not how it works. You can expense cell phone bills and lunches, sure, but VCs aren't paying for your fancy apartment. > EDIT: I'm not a tax person Most non-tech discussions on forums like this one should start and end with this disclaimer. Watching people here regularly talk about topics like law, "money laundering", write-offs and tax shelters is as hilarious and disconnected from reality as a hacking scene from CSI.

dcow 4y ago
Ultimately, VCs are paying for your fancy apartment. They're just paying more the more expensive your personal life is. I wouldn't dismiss the obviously aligned incentives here that encourage minimization of capital expenditure for business entities, especially in the USA. I'm making no moral or legal judgements, just commenting based on what I've encountered and witnessed. I'm not a founder and never consulted anybody with legal qualifications regarding this matter either in any specific instance. But, in my anecdotal experience, there is a rather broad spectrum of contexts and interpretations on how to do what's best for you and the business in your specific situation. On the flip side, it's not a big conspiracy, in the USA we heavily subsidize the pursuit of new enterprise. And the law reflects that. Smart people and successful businesses minimize their tax liability.
- sushid 4y ago
  I don't understand your point. Of course at the end of the day VCs are paying for everything in the sense that they funded you, but there's a clear distinction between personal expenses (which come out of your salary) and business expenses (which you charge your business CC on). Of course you wouldn't have fancy VC dinner on your personal dime but if you're meeting VCs to raise a round, talking to a potential customer, etc., those are legitimate business expenses. No VC is going to be paying for your rent or your car lease, which is what you implied above. That's patently false.
  - dcow 4y ago
    You say it’s patently false and yet here I am saying I’ve seen startups own houses and cars. Maybe your and their tax accountants would disagree, but that’s a different topic. My point is simply that the low founder salaries are not because the founders are being particularly frugal or living humbly. The low salaries exist simply to pay for the things that the business’ accountant can’t expense. In every respect, the founder lives their business.

agrippanux 4y ago

One thing that can fly under the radar is when a founder uses their personal credit card for things like social media ad spend, and then gets reimbursed by the company. It's a very easy way to rack up tens to hundreds of thousands of dollars on a credit card which equals tons of points for things like travel, electronics purchases, gift cards, etc.

tensor 4y ago

Yeah no, this is bullshit and won't pass tax inspection. I founded and exited a company and yes I did live humbly until we actually managed a significant raise. Even then I still took a low salary. I only expensed things that were actually company related.

rdli 4y ago

In the short-term this might work, but if you're trying to build a company that grows, then it doesn't work so well, because other people you hire will ... want the same thing. If you expense your cell phone bill every month, then it's reasonable for other employees to expect the same, if they're also using it for work. Better to get the board to sign off on a slightly higher salary to offset these expenses, IMO.

MangoCoffee 4y ago

IRS just got their funding to hire more people. I'm pretty sure what used to be "not really look at" will be under microscope.

aerosmile 4y ago

This is how fake news happens. I really wish we all took a bit more time to research things before we publish them, because I guarantee you there will be more people today running around and sharing this exact same fake news about founders living in apartments paid for by their startups.

vecter 4y ago

> You think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year living humbly? Think again. IDK, I always thought this part of the narrative was rather misleading. In what situation would a founder have a company with meaningful investor backing and not use that money to pay for an office for employees and instead use it to pay for their rent? The tone and insinuation of your message is that founders pay themselves $50k/year but then splurge excessively using company funds on "fancy SF and NYC apartments" (which, depending on how fancy you mean, could go for $10-2k/month), which would almost certainly qualify as both tax fraud and fraud against the company. Your edit doesn't really do anything to alleviate the messaging, because you basically say (a) founders often commit fraud (b) ok maybe not, but I'm not erasing my earlier statement. FWIW when I started a company in SF in 2012, my cofounders and I did indeed pay ourselves $50k/year and pretty much 100% of that money after taxes went to rent and living costs (maybe saved $5k/year, I wasn't keeping track that closely). This was after paying ourselves $0 for a while of course. We did not live in fancy apartments or use a penny of company funds to expense rent or any other personal living costs. In fact, even after we raised $35m for our company, we still only paid ourselves $90k for another couple years.

lemax 4y ago

Writing off parts of your rent as a founder or business owner is perfectly ok with the IRS. Such a space needs to have "regular and exclusive use" for running your business and be your principle place of business (i.e. you do not maintain an office outside of your home). In my experience CPAs consider it reasonable to take the square footage of the dedicated office area and divide it by the total square footage of your home and deduct that much from your rent. https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction https://www.irs.gov/businesses/small-businesses-self-employe...

triceratops 4y ago

Relevant Seinfeld: https://www.youtube.com/watch?v=XEL65gywwHQ https://www.youtube.com/watch?v=XEL65gywwHQ