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This is a great resource I wish I had before. As a bootstrapped founder, I would love to see more information on how to handle common scenarios bootstrappers fa

This is a great resource I wish I had before. As a bootstrapped founder, I would love to see more information on how to handle common scenarios bootstrappers face. For example, one big issue I'm facing is how to handle the legal and tax issue of continuously depositing more and more cash into a business as it comes in from another income stream. This becomes really complicated not just from the perspective of how this affects other equity holders, but also the question of deducting the loss from my income while the company is not yet profitable. LLCs and S-Corps are touched upon in the handbook but the issues around stock basis seems to really complicate the situation fast without providing much benefit for the deduction part. I would think this would be a common issue since many founders aren't going to raise money beyond angel/f&f initially and will need to self-fund until they do or until they break even but I have yet to find good compliance resources for bootstrapping.

pc86 3y ago
I'll be honest these all sound like very situation-specific tax questions for an accountant (or even tax attorney), and not something any founder should be wasting their time learning.
- jameslk 3y ago
  What makes you feel this example is a very situation-specific question rather than a common issue a bootstrapped founder might face?
  - pc86 3y ago
    The "right move" if there even is one will likely depending on 1) where that other income stream comes from - W2 wages, investments, wholly-owned business profits, partnership profits, etc; 2) separately from 1, whether you have other forms of income coming in; 3) are you married and are they part owners? explicitly or via marital property? 4) is anything securing the bootstrapped business that might be affected by paper losses? And I'm sure half a dozen things I'm not thinking of because I'm not an attorney or accountant. Even if you can generalize a lot of these, this seems like exactly the sort of thing that should be outsourced to professionals who do it every day rather than wasting cycles becoming an expert in the minutia of state and federal tax laws.
    - jameslk 3y ago
      I agree that there's many factors that could affect the "right move" and those should likely be handled by someone qualified. That said, I think the situation of someone bootstrapping from a job or from another business income (freelancing, agency, etc) would be common and similar enough for some general options and traps to avoid. I myself have had to learn some very hard lessons on what to do and what not to do. Not because I didn't consult attorneys, tax attorneys, and tax advisors (I did), but the cost of their services have far exceeded the value I could have learned from some online resources. There's also a level of trust you have to put into the specialists to give you the right advice, and that too has been an expensive minefield at times. Perhaps I'll be the one to write about my experiences here once I'm done going through them ;)
swampthing 3y ago
Thanks! You're right, this would be a good topic for us to cover in a subsequent handbook — in the meantime, if it's helpful, I think the way I've seen it done is pretty casual, where founders will cover expenses and then later have the company reimburse them when it has more funds. But that's more for the scenario where the bootstrapping phase is a relatively short and temporary (or at least the part of bootstrapping where you have to fund from other sources is). If you think you might be funding from other sources for quite a while (sounds like that might be your situation), then yea, the tax considerations become more relevant and important. Another common approach is to put the money in on a safe or convertible note, though that doesn't help with pass-through taxation.
- deleted 3y ago
  [deleted]
jll29 3y ago
Thanks for the very useful information. I agree with the sentiment already expressed that PDF format would be desirable (for me: to use the document in teaching entrepreneurship). In general, could I suggest working on a flow-chart that embodies incorporation best practices regarding the typical order of things, a sort of "playbook"? Also, it would be fantastic to hear from successful startups which order to things they followed, and where they diverted from orthodoxy (e.g. Google skipped some steps in its IPO process, angering investment banks in the process but coming out of it fine). When you don't know what you are doing and you cannot buy top dollar advice, it's probably best to follow the well-trodden path, but most won't know what that looks like. Another comment: It would be superb if someone collected similar information for other jurisdictions (London, Paris, Berlin, Talinn, Singapore).
- swampthing 3y ago
  Thanks! I'm very glad that the topic of PDFs came up here because we had thought about them and thought that most people would probably be happier with eBook formats. But given the conversation here, we will definitely be putting out PDFs as well! And thanks for the great suggestions. You're right, the issue is completely that for someone new to all of this, it's not obvious what the well-trodden path is. We don't go up to the point of IPO, but at least for formation, we have the process covered in our first handbook (the one we posted today is our second one) here: https://handbooks.clerky.com/legal-concepts/formation#process https://handbooks.clerky.com/legal-concepts/formation#proces.... I agree a flow chart would be helpful! Also, I completely agree about other jurisdictions. The issue, I think, is really scale. Something like this handbook, and Clerky in general, is only possible because there is this critical mass around Delaware and startups. As it is today, that critical mass is somewhat unique from what I can tell. My hope is that technology will help reduce the level of critical mass that is necessary, so that things like Clerky and this handbook can exist for more situations.

pc86 3y ago

I'll be honest these all sound like very situation-specific tax questions for an accountant (or even tax attorney), and not something any founder should be wasting their time learning.

jameslk 3y ago
What makes you feel this example is a very situation-specific question rather than a common issue a bootstrapped founder might face?
- pc86 3y ago
  The "right move" if there even is one will likely depending on 1) where that other income stream comes from - W2 wages, investments, wholly-owned business profits, partnership profits, etc; 2) separately from 1, whether you have other forms of income coming in; 3) are you married and are they part owners? explicitly or via marital property? 4) is anything securing the bootstrapped business that might be affected by paper losses? And I'm sure half a dozen things I'm not thinking of because I'm not an attorney or accountant. Even if you can generalize a lot of these, this seems like exactly the sort of thing that should be outsourced to professionals who do it every day rather than wasting cycles becoming an expert in the minutia of state and federal tax laws.
  - jameslk 3y ago
    I agree that there's many factors that could affect the "right move" and those should likely be handled by someone qualified. That said, I think the situation of someone bootstrapping from a job or from another business income (freelancing, agency, etc) would be common and similar enough for some general options and traps to avoid. I myself have had to learn some very hard lessons on what to do and what not to do. Not because I didn't consult attorneys, tax attorneys, and tax advisors (I did), but the cost of their services have far exceeded the value I could have learned from some online resources. There's also a level of trust you have to put into the specialists to give you the right advice, and that too has been an expensive minefield at times. Perhaps I'll be the one to write about my experiences here once I'm done going through them ;)

swampthing 3y ago

Thanks! You're right, this would be a good topic for us to cover in a subsequent handbook — in the meantime, if it's helpful, I think the way I've seen it done is pretty casual, where founders will cover expenses and then later have the company reimburse them when it has more funds. But that's more for the scenario where the bootstrapping phase is a relatively short and temporary (or at least the part of bootstrapping where you have to fund from other sources is). If you think you might be funding from other sources for quite a while (sounds like that might be your situation), then yea, the tax considerations become more relevant and important. Another common approach is to put the money in on a safe or convertible note, though that doesn't help with pass-through taxation.

deleted 3y ago
[deleted]

jll29 3y ago

Thanks for the very useful information. I agree with the sentiment already expressed that PDF format would be desirable (for me: to use the document in teaching entrepreneurship). In general, could I suggest working on a flow-chart that embodies incorporation best practices regarding the typical order of things, a sort of "playbook"? Also, it would be fantastic to hear from successful startups which order to things they followed, and where they diverted from orthodoxy (e.g. Google skipped some steps in its IPO process, angering investment banks in the process but coming out of it fine). When you don't know what you are doing and you cannot buy top dollar advice, it's probably best to follow the well-trodden path, but most won't know what that looks like. Another comment: It would be superb if someone collected similar information for other jurisdictions (London, Paris, Berlin, Talinn, Singapore).

swampthing 3y ago
Thanks! I'm very glad that the topic of PDFs came up here because we had thought about them and thought that most people would probably be happier with eBook formats. But given the conversation here, we will definitely be putting out PDFs as well! And thanks for the great suggestions. You're right, the issue is completely that for someone new to all of this, it's not obvious what the well-trodden path is. We don't go up to the point of IPO, but at least for formation, we have the process covered in our first handbook (the one we posted today is our second one) here: https://handbooks.clerky.com/legal-concepts/formation#process https://handbooks.clerky.com/legal-concepts/formation#proces.... I agree a flow chart would be helpful! Also, I completely agree about other jurisdictions. The issue, I think, is really scale. Something like this handbook, and Clerky in general, is only possible because there is this critical mass around Delaware and startups. As it is today, that critical mass is somewhat unique from what I can tell. My hope is that technology will help reduce the level of critical mass that is necessary, so that things like Clerky and this handbook can exist for more situations.