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Mistake 1: Taxes This thing about not noticing that you weren't paying payroll taxes wasn't a "mistake." It was pure head-in-assery. How can you "miss" the f

Mistake 1: Taxes This thing about not noticing that you weren't paying payroll taxes wasn't a "mistake." It was pure head-in-assery. How can you "miss" the fact that you weren't being subtracted for payroll taxes? One quarterly / annual review after another, for 3 years? It's like running a personal budget, and "missing" the fact that you aren't paying rent.

SilasX 12y ago
Except that if you miss paying rent, they let you know, and quickly.
- reborn426 12y ago
  they notice that? ;-)
- coderzach 12y ago
  They do with taxes as well. But from the article, the IRS had an old name and address on file.
- dreamweapon 12y ago
  Oh, the IRS and other tax authorities will definitely "remind" you, eventually. But yeah, it tends to take a bit longer. And if you don't have visceral awareness of this fact -- you shouldn't be hiring people, and handing out salaries.
- jgreen10 12y ago
  Making sure your bills are paid is the responsibility of any adult. If you're running a business, messing up your taxes should be one of your deepest fears. The general sense I got from the story was: We were young and stupid, but instead of doing drugs, we convinced VCs to give us $3.8 million, which made us believe that we knew what we were doing.
  - SilasX 12y ago
    I agree completely! I was only speaking to the point of "how long until it's impossible to miss this", and how the comparison to rent doesn't work because it's much shorter.
- Domenic_S 12y ago
  Except that if you do your books, you'll say "I should have $X in the bank" and then you look at your account and you have 1.5$X so you know something's wrong. At least, you should.
- sbisker 12y ago
  Rent, sure, but many other personal responsibilities are not so kind - especially from vendors who can legally tack on cumulative late fees. Try not paying your Comcast or Verizon bill on time for a month or two and see what happens. The envelope only starts coming in red after quite a few fees are tacked on. [EDIT: Don't actually try that :) ]
recalibrator 12y ago
I've done it when I incorporated my consulting business. I didn't know how to do my own payroll. Hey, it happens, oh ye wise and holy one!
- tptacek 12y ago
  Screwing up your personal taxes in a consulting business is a debacle but also a rite of passage for consultants. It happens to everyone. Screwing up payroll tax withholding for employees is financial catastrophe. You've taken money from your employees on behalf of the government, but then kept it. Your liability in that case can be criminal, maybe even if you didn't deliberately defraud the government. So, those two cases are not comparable.
  - jacquesm 12y ago
    > It happens to everyone. It happens to a lot of people but certainly not to everybody. As a rule of thumb in the first two years you simply want to reserve 50% of your gross until you get a better handle on what your deductibles are and what it is that you exactly owe and then you can slowly home in on the correct amount to reserve. Too many variables to get closer but 50% should cover all but the most extreme cases. Simply open a savings account and park that 50% there right after you invoice. If you're invoicing with GST/VAT/whatever it is called where you live then you get to subtract out the VAT first, then do the 50%, then add all the VAT back in and save that.
    - tptacek 12y ago
      That's a good rule of thumb, but a better rule is probably to just get an accountant on day one. For 1099 consulting businesses, doing your own taxes is probably a false economy. I think a lot of people assume they can put off getting an accountant until they're sure the business is serious. Which is probably why so many of the stories I've heard (and, to add to that, my own story) are about the tax screwup consequences of those first couple gigs you do before you formalize the company.
      - 12y ago
gatehouse 12y ago
It boils down to not having a handle on the general ledger, which if not suicide is at least reckless self-endangerment. But I think it is plausible for someone who is administrativaphobic. But there is a reason this is mistake #1.
- dreamweapon 12y ago
  Or on another, much deeper level it boils down to: "OMG look we're so HAWT, we're co-founders after all, not gutless employees, and we're only in our 20s, doing all these amazing things, and we have this cool office and all these smart, hip people working for us.. and umm, budgets? due diligence? CPAs? What are those?"
  - forgottenpass 12y ago
    Woah, slow down there bud. You're not allowed to have negative opinions on anything a entrepreneur does on Hacker News.
    - cthulhuhodor 12y ago
      god bless you both!
- ugh123 12y ago
  > it is plausible for someone who is administrativaphobic Okay. But then you shouldn't really call oneself a CEO.
  - infiniteri 12y ago
    Isn't that why he was writing this? To explain that his mistakes aren't representative of what he now knows he should do as CEO? I understand what you're saying on a literal level, but it's very possible he's been a good CEO in other areas that he hasn't mentioned here. I would hold off on the judgment.
seancoleman 12y ago
Founders get bombarded with many corporate taxes they are often unfamiliar with. As a founder, it's not inconceivable to think all the proper taxes are being paid when one slips through the cracks.
- tptacek 12y ago
  There are no excuses on payroll taxes. The tax authorities aren't fucking around about them.
- slantyyz 12y ago
  >> As a founder, it's not inconceivable to think all the proper taxes are being paid when one slips through the cracks. In any company, someone's responsible for the books (whether it's the CEO, some other employee, or an outsourced accountant), and you would think that the bank statements would be reconciled with the general ledger more than once a year. At the very least, it would have been done with each fiscal year end. That the unpaid payroll taxes weren't noticed for almost three years is mind boggling to me.
  - endersshadow 12y ago
    This just means that they were running their business off of their account balance on B of A's site. It's also known as "flying by the seat of your pants."
- forgottenpass 12y ago
  OK. But why are these founders so arrogant and pennypinching that they don't just contract or hire someone to do this for them?
- nyc_str8tsh00t 12y ago
  yeah, but if you google this company and see other articles about them, who their customers were, and how many people they had, it's pretty clear this was a lot mroe than just "slipping through the cracks". I'm sorry, but allowing a company to grow to that point without even the most basic handle on the books is gross negligence, not just incompetence.
bilalel 12y ago
I think this mistake had a cascade effect on the other ones. If you remove this one, a lot of other ones should be manageable.
lauradhamilton 12y ago
Yeah, I was confused by that as well. I don't see how you could have any books of any sort and not notice the discrepancy.

SilasX 12y ago

Except that if you miss paying rent, they let you know, and quickly.

reborn426 12y ago
they notice that? ;-)
coderzach 12y ago
They do with taxes as well. But from the article, the IRS had an old name and address on file.
dreamweapon 12y ago
Oh, the IRS and other tax authorities will definitely "remind" you, eventually. But yeah, it tends to take a bit longer. And if you don't have visceral awareness of this fact -- you shouldn't be hiring people, and handing out salaries.
jgreen10 12y ago
Making sure your bills are paid is the responsibility of any adult. If you're running a business, messing up your taxes should be one of your deepest fears. The general sense I got from the story was: We were young and stupid, but instead of doing drugs, we convinced VCs to give us $3.8 million, which made us believe that we knew what we were doing.
- SilasX 12y ago
  I agree completely! I was only speaking to the point of "how long until it's impossible to miss this", and how the comparison to rent doesn't work because it's much shorter.
Domenic_S 12y ago
Except that if you do your books, you'll say "I should have $X in the bank" and then you look at your account and you have 1.5$X so you know something's wrong. At least, you should.
sbisker 12y ago
Rent, sure, but many other personal responsibilities are not so kind - especially from vendors who can legally tack on cumulative late fees. Try not paying your Comcast or Verizon bill on time for a month or two and see what happens. The envelope only starts coming in red after quite a few fees are tacked on. [EDIT: Don't actually try that :) ]

recalibrator 12y ago

I've done it when I incorporated my consulting business. I didn't know how to do my own payroll. Hey, it happens, oh ye wise and holy one!

tptacek 12y ago
Screwing up your personal taxes in a consulting business is a debacle but also a rite of passage for consultants. It happens to everyone. Screwing up payroll tax withholding for employees is financial catastrophe. You've taken money from your employees on behalf of the government, but then kept it. Your liability in that case can be criminal, maybe even if you didn't deliberately defraud the government. So, those two cases are not comparable.
- jacquesm 12y ago
  > It happens to everyone. It happens to a lot of people but certainly not to everybody. As a rule of thumb in the first two years you simply want to reserve 50% of your gross until you get a better handle on what your deductibles are and what it is that you exactly owe and then you can slowly home in on the correct amount to reserve. Too many variables to get closer but 50% should cover all but the most extreme cases. Simply open a savings account and park that 50% there right after you invoice. If you're invoicing with GST/VAT/whatever it is called where you live then you get to subtract out the VAT first, then do the 50%, then add all the VAT back in and save that.
  - tptacek 12y ago
    That's a good rule of thumb, but a better rule is probably to just get an accountant on day one. For 1099 consulting businesses, doing your own taxes is probably a false economy. I think a lot of people assume they can put off getting an accountant until they're sure the business is serious. Which is probably why so many of the stories I've heard (and, to add to that, my own story) are about the tax screwup consequences of those first couple gigs you do before you formalize the company.
    - 12y ago

gatehouse 12y ago

It boils down to not having a handle on the general ledger, which if not suicide is at least reckless self-endangerment. But I think it is plausible for someone who is administrativaphobic. But there is a reason this is mistake #1.

dreamweapon 12y ago
Or on another, much deeper level it boils down to: "OMG look we're so HAWT, we're co-founders after all, not gutless employees, and we're only in our 20s, doing all these amazing things, and we have this cool office and all these smart, hip people working for us.. and umm, budgets? due diligence? CPAs? What are those?"
- forgottenpass 12y ago
  Woah, slow down there bud. You're not allowed to have negative opinions on anything a entrepreneur does on Hacker News.
  - cthulhuhodor 12y ago
    god bless you both!
ugh123 12y ago
> it is plausible for someone who is administrativaphobic Okay. But then you shouldn't really call oneself a CEO.
- infiniteri 12y ago
  Isn't that why he was writing this? To explain that his mistakes aren't representative of what he now knows he should do as CEO? I understand what you're saying on a literal level, but it's very possible he's been a good CEO in other areas that he hasn't mentioned here. I would hold off on the judgment.

seancoleman 12y ago

Founders get bombarded with many corporate taxes they are often unfamiliar with. As a founder, it's not inconceivable to think all the proper taxes are being paid when one slips through the cracks.

tptacek 12y ago
There are no excuses on payroll taxes. The tax authorities aren't fucking around about them.
slantyyz 12y ago
>> As a founder, it's not inconceivable to think all the proper taxes are being paid when one slips through the cracks. In any company, someone's responsible for the books (whether it's the CEO, some other employee, or an outsourced accountant), and you would think that the bank statements would be reconciled with the general ledger more than once a year. At the very least, it would have been done with each fiscal year end. That the unpaid payroll taxes weren't noticed for almost three years is mind boggling to me.
- endersshadow 12y ago
  This just means that they were running their business off of their account balance on B of A's site. It's also known as "flying by the seat of your pants."
forgottenpass 12y ago
OK. But why are these founders so arrogant and pennypinching that they don't just contract or hire someone to do this for them?
nyc_str8tsh00t 12y ago
yeah, but if you google this company and see other articles about them, who their customers were, and how many people they had, it's pretty clear this was a lot mroe than just "slipping through the cracks". I'm sorry, but allowing a company to grow to that point without even the most basic handle on the books is gross negligence, not just incompetence.

bilalel 12y ago

I think this mistake had a cascade effect on the other ones. If you remove this one, a lot of other ones should be manageable.

lauradhamilton 12y ago

Yeah, I was confused by that as well. I don't see how you could have any books of any sort and not notice the discrepancy.