6 ms·

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

by patio11 13y ago

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.

ThomPete 13y ago
Agree. 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.
- adambenayoun 13y ago
  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.
  - dclara 13y ago
    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.
- jeremyjh 13y ago
  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?
  - patio11 13y ago
    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.
    - a8da6b0c91d 13y ago
      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.
Swizec 13y ago
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.
- dclara 13y ago
  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.
tptacek 13y ago
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.
- windexh8er 13y ago
  This. 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.
- ghc 13y ago
  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.
- skunkworks 13y ago
  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.
  - johnjlocke 13y ago
MortenK 13y ago
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.
- patio11 13y ago
  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.)

by patio11 13y ago

ThomPete 13y ago

Agree. 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.

adambenayoun 13y ago
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.
- dclara 13y ago
  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.
jeremyjh 13y ago
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?
- patio11 13y ago
  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.
  - a8da6b0c91d 13y ago
    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.

Swizec 13y ago

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.

dclara 13y ago
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.

tptacek 13y ago

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.

windexh8er 13y ago
This. 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.
ghc 13y ago
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.
skunkworks 13y ago
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.
- johnjlocke 13y ago

MortenK 13y ago

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.

patio11 13y ago
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.)