
I am Financing my Startup with my 401k - ezl
http://blog.ezliu.com/blog/financing-my-startup-with-my-401k/
======
steve8918
The only reason why this isn't a good idea is because the author doesn't
appear to quite understand the entire tax implications. This makes me think he
hasn't done his due diligence.

The author doesn't seem to realize that he will need to pay income tax on the
money that he withdraws, on top of the 10% early withdrawal. This makes the
cost of acquiring capital much higher than if he took a loan or an investment.
If he has $100k in his 401k, and he withdraws it all in one chunk, he will be
left with maybe $45k after 10% penalty and taxes.

The upside is that if he does this properly, ie wait until the next fiscal
year, and if he doesn't have any other income income, the taxes he pays might
be much less than if he had a regular income.

If all he needs is $40k, if I were him, I would look into alternate methods,
like taking out a loan, etc. I've gotten some credit card offers for up to
$25k interest fee for about a year (2% transaction fee). If he's this
confident he will make money, maybe he should investigate this and if it
doesn't take off, he can pay it off with a 401k withdrawal. He would need to
figure out at what point he would be making income to pay back this loan, etc.

But straight withdrawing money from the 401k seems like a waste.

~~~
lsllc
Not necessarily. You can roll over an existing 401k into your startup without
taxes and penalty:

<http://en.wikipedia.org/wiki/Rollovers_as_Business_Start-Ups>

This is how many people buy those Dunkin' Donuts or McDonald's franchises.

As for it being a good idea ... do you really think your 401k in mutual funds
is going to give you a comfortable retirement? After your hard earned 401k
savings are pillaged & plundered by the likes of GS and their HF algo's, Ben
Bernanke & friends have printed so much money that your retirement fund will
barely buy a new car when you retire and Congress has frittered your Social
Security away on endless war ... this doesn't seem like such a bad idea!

~~~
zavulon
Goddamn, I wish I knew about this 3 years ago when I did the exact same thing
as the OP. I ended up paying the penalty and everything. Although now, three
years later we are profitable[1], have 15 employees and never taken a cent
from outside investors. So no regrets here.

[1] I should mention that we're a business, not a startup by PG's definition,
and were bringing in revenue from day 1.

~~~
Evbn
Have you asked your accountant about amending to tax filings?

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rdl
Obviously lots of reasons not to do this with 100% of your retirement, but
it's possible you have a relatively overfunded 401k (unlikely) vs. other
assets (possible). Or maybe you have rich parents who will cover your
retirement, so your 401k is just a tax shelter.

There's actually some crazy stuff you can do with a large enough 401k to use
it to fund a business startup -- it's called a "Rollover as Business Startup
(ROBS)". Essentially you open a new 401k plan for a new business, roll over
your old 401k balance to the new plan, and have the new plan buy stock in the
employer (i.e. the new company), financing it. Essentially you can get your
ownership of a startup into a 401k, a huge tax savings (and complete tax
savings if it is a Roth 401k). This also avoids the early distribution penalty
and income tax on the 401k balance.

There are lots of issues setting it up (the IRS hates it, many of the people
promoting it are scammers, so basically if there are any paperwork
deficiencies in the plan, you're screwed), but it has worked, and is
technically legal. It requires $50-100k 401k balance to be generally
worthwhile, and is mainly used by small business or franchise people who can't
otherwise get financing, but is an option.

------
lifeisstillgood
I did start with the same as everyone else - then I remembered the HN oath -
critique the startup not the entrepreneur.

Summary: it looks pretty good, but you are not explaining yourself front and
center - pitch to landlords, get the money quote from down the bottom of the
page, and please, this is a long haul business - get someone with deeper
pockets behind you - you have traction, you have clients, you have committed
your last penny - you hit tick every box. Go to SV, find angels. Get a longer
runway. Put this on ANgelList now.

So, in the spirit of HN, a critique :

1\. Explain the pitch better on the front page - "Landlords - get tenants to
fill in applications online. Quicker, easier, can see status of all applicants
instantly, and we conduct bank checks and update you in real time"

I had to dig around to understand that (and I may be wrong of course)

(Whats the competition like - I would guess this is something realtors offer
routinely)

2\. Front page again - no one rents the Golden Gate bridge. Try something that
says rental please - give me subconcious cues to what you are selling. look at
[http://www.istockphoto.com/stock-
illustration-13635470-your-...](http://www.istockphoto.com/stock-
illustration-13635470-your-home-keys.php?st=1f61bae) \- ten second search
brought up hundreds of possibilites.

3\. The learn more page - the images on the right look like misaligned iframes
- put think borders around them to indicate they are screenshots - try putting
them at 45o angles to make it clearer

4\. the online application - break it into manageable chunks - bootstrap does
tabs - it was daunting on PC - in my iphone its pretty bad.

4\. If there ever was a case for having people sign in with facebook or
linkedin - this is it. Half of the info wanted from a tenant is in their
profile.

5\. and back to the front page <<< "More applications per vacancy, faster
inventory turnover and rapid closings. Rocket Lease has saved me $6,000 this
year!">>> \- its three scrolls down ! Put in in place of the iphone image. or
carousel it. sell yourself on your front page. Please.

Its pretty good - I have no idea of the market in the US, but you seem like
you are on a long grind to market acceptance, rather than a viral explosion.
So I thin your 40K may be a short runway but good luck - and please explain
yourself in the front page. As a landlord I would have walked long before
understanding or seeing the money testimonial.

~~~
ezl
lifeisstillgood -- I really appreciate this. hard to get great feedback, and
your list shows that you really clicked through the site. spending your time
for someone is a fantastic compliment.

~~~
lifeisstillgood
np - good luck.

This should be a _profitable_ long haul play - build a brand around your story
and the value to landlords, sure, but the bread and butter should come from
white labelling to every realtor from here to Nebraska. Really, ask for some
advice here on pitching to AngelList. You really do hit all the boxes, but
sales to realtors is notorious (at least in UK - highly fragmented and
demanding market, but they all want nice regular monthly paychecks from
rentals - and you are a value add they could sell)

------
georgeecollins
As an older guy on this page I want to point out how valuable even just a few
thousand dollars are when they are put away in your twenties in a tax free
account. Money in a retirement account is not the same as money in other
accounts because in many cases you can give it to your spouse or your children
on much better terms then other investment accounts.

You may have read about Mitt Romney's IRA. It is huge. Obviously that is a guy
that goes to great lengths to invest wisely and avoid taxes. When you are rich
you will wish you could get more money into that account because of it's
preferential tax treatment.

That said, I hope your company does great and you end up so wealthy it doesn't
matter. People who are hardworking and ambitious usually end up OK even if
there financial planning isn't perfect. Good luck.

~~~
Evbn
What assets are tax disadvantaged when transferring to a spouse?

And if you have enough funds to be in inheritance tax territory for children,
after gift and education allowances and trusts and nepotistic employment, well
then it's OK to give a little to government or charities instead of spoiling
the kids to death.

------
duiker101
You are really gambling with your feature because the way I get is I'll use my
money this way if I win I will get the biggest cut possible, I do not see
other reasons of doing it apart from that is easier. But is it worth it? If
you had received some founds you could be safe, lose and try again maybe. But
you might also had not the opportunity to rise some founds, which would mean
that some people do not believe you can have so much success as you believe.
They can be wrong, you can be wrong, but it's usually better to have more
views on your idea than only yours because it just works better.

That said, I wish you the best of lucks.

You also might want to check your font, on chrome windows 7 looks really bad
<http://i.imgur.com/vz8cZ.png>

~~~
stanmancan
I agree, the font is terrible in Chrome on Windows 7!

------
mratzloff
One of the most basic rules of finance is diversification. You are putting all
of your eggs in one basket. That usually doesn't end too well.

I wish you the best, but betting everything means you could lose everything,
too.

------
autolico
Congrats.

I do understand your position and I share it completely. After working for 5
years at Tomtom, I had an idea. It took me half a year to refine it, hire the
right people and basically be ready for some round of funding. Thus I found
myself stuck with the usual hassle of producing the right material to convince
eventual investors to bet on my company. I spent precious time and efforts in
doing useless stuff like business plans, investor packages, etc. And I was
also really skeptic about giving away equities. All in all you seek investors
for... what? Counseling? Money? Contacts? Not being able to give myself a
clear answer to this question I decided to become the owner of my future and I
fully funded my startup with roughly $300000: beestar.eu (shamelessly self
promoting here :)).

I am perfectly conscious that I might lose a lot of money, but I do need to
worry about the technology I am trying to ship rather than inheriting the
compromise burden that comes with investor's money (not to mention the usual
equity's hemorrhage).

If everything fails, this will still be the most exciting adventure of my
life.

------
cko
I can't see why many comments label this as "gambling with one's future." What
are his alternatives (if he chose to self-fund)? Saving up cash to use as
startup funding is pretty much the same thing - and as ezl stated in his post,
retirement money isn't sacred. Actually, to be more specific, "401k" money
isn't more sacred than "cash saved up that is liquid." Using either can affect
one's retirement/future.

------
wheaties
I wouldn't do this. You're already gambling your future by not earning income,
depleting your stored reserves, and potentially missing "standard" career
advancement opportunities. Don't you realize that most financial advisors
recommend you do not put your company's stock in your 401k as a diversifier?

Good luck.

------
fatbird
At the end of the day, ezl made the decision and will live with the
consequences, so good luck to him.

What makes me nervous, and I consider to be great big red lights on this idea,
is that his description of why he did it is full of emotional language about
committing and investing in himself and the thrill of making it "real". These
are words and approaches that make feel very cautious about anyone because I'm
always unsure how much the decision is based on a cold appraisal of the facts
and the risk/reward ratio, vs. rah-rah.

I doubt ezl's blog entry is even a tenth of what he went through in making the
decision (at least I hope so), so I won't presume to judge. But as an outsider
critiquing this idea, I want to see more cold logic, less adrenaline.

------
andymoe
Pretty expensive way to go especially because of the tax hit. As a rule you
should be dumping as much money into a retirement account as you can once you
have some cushion in the bank... Instant ~30pct return on investment for the
classic IRA/401k.

------
mikeburrelljr
Best. Descriptive. Images. Ever. (Which best describes you?)
<https://www.rocketlease.com/accounts/register/>

On a serious note, I'd recommend changing those.

~~~
K2h
Specifically what did you dislike?

------
process
I considered this myself once. The thing is, when you begin a start up you are
investing yourself already. If you go for VC, you may get less return if you
succeed, but the ability to do it all again if you fail.

------
jriley
Congrats on committing.

Do be aware you may owe regular income tax on the distribution as well as the
10% penalty.

For others looking to tap retirement capital you might research self-directed
IRAs and 401ks. I don't have one but considered it for a real estate deal
recently.

Quick Tax Reference: [http://turbotax.intuit.com/support/iq/Less-Common-
Income/Wit...](http://turbotax.intuit.com/support/iq/Less-Common-
Income/Withdrawing-Money-From-Your-401-k--Plan-As-a-Hardship-
Distribution/GEN12549.html)

~~~
TomatoTomato
Not necessarily, if this is a Roth-401(k), then there are certainly penalty
free distribution options for your personal contributions. If not, there are
legal, but backdoor, ways of "investing" your traditional-401(k) into the
newly found startup corporation (a family member did this recently). I think
you can also take loans against a 401(k).

Either way, please consult a CPA before taking any action.

------
benwerd
Scary, but I think worth doing - congratulations.

Having been a landlord in the past, I can also very easily see the market for
your product. I really needed it, in fact, and I think your major issues are
going to be getting the onboarding experience just right, and letting the
landlord / agency communities know about it. (In fact, it might help landlords
do it without agency help, which is nicely disruptive.) Those are nice
problems to have.

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andre3k1
Awful idea! You claim to be perfectly rational, however, that is not the case.
Would it be perfectly rational for me to forgo _my_ 401k to finance _your_
startup? No, it would not. Irrationality and partiality are one in the same.
Do not be biased toward your idea because you might fail -- i.e. "eggs in one
basket." Right now your retirement money might not seem sacred, but later on
in life...

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jpdoctor
No one seems to have commented on one of the major protections of 401k money:
401k has special protection during bankruptcy.

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adjwilli
I did this too, but I was 27 at the time and it was only about $5000 I had in
there. It paid off as my company has allowed me to save more now. It is a very
risky thing to do. But if you are young and it's a good source of capital. I
also like the idea of investing in myself, not some faceless institution.

------
brador
I like it. If you angle it just right you could hit a goldmine with this.

I would split test the single page vs. multiple page application form.

Get those early users in, get feedback, iterate. Push your main selling
points. If you can get _some_ users using this service, you can get many. I
like the name too.

------
dadro
Had you considered taking a loan out against your 401K? Most of the financial
firms managing 401K's offer them. The interest rates are favorable and you
don't get hit with all the penalties. I recently faced a similar decision and
opted for the 401K loan.

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rpm4321
The main determiner of whether this is gutsy or foolish is what age he is. If
he still has two or three decades of earning potential in the workforce in the
event his company craters, he can recover.

~~~
moocow01
Just something to think about: the years that are most impactful on your
retirement are when you are young. Id argue that he'll have a very hard time
catching up through traditional means if he is young and things go south.

~~~
Tyrannosaurs
This.

The power of compound interest. Every time I look at how much I need to save
for a decent retirement I wish I'd started five years earlier (which I
completely could have afforded).

~~~
35636
That was more true at a time when interest rates on CDs were 6%. Now they are
1%.

If you want a decent return today you've got to heavily leverage or take on a
lot of risk. That's probably going to be the norm for a while.

~~~
Tyrannosaurs
That's true, the question is how quickly will he be able to return a similar
amount to the fund?

Yes, the next three years might be low but it will rise again and the question
isn't just when he can start paying back into it, but how quickly can he get
it back to it's current level.

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ergest
Haven't you heard about the wonders of OPM?

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jawns
Might want to fix the link that plugs your startup.

~~~
ezl
thanks jawns: i suck at markdown

