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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 fu
by 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 agoI 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.
- clarky07 13y agoThere 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".
- patio11 13y agoWe'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.