
Ask HN: My startup failed. $9k in debt and need to pay most of it in 12 days. - debtscrewed
HN,<p>A startup that I am part of failed. Prereq: USA, C-Corp in Delaware. We have $6k in server fees to Rackspace and $3k in debt with our lawyer. We also have a huge amount of credit card fraud that went through our credit card processing account/merchant account (like $8k), which is going to be an ongoing issue for the next year+ and may end up in me and my SSN being blacklisted from Visa and Mastercard.<p>I used to be able to cover this kind of failure, but over the past few months, I've sunk tons of my money into this company and completely depleted my checking and savings accounts.<p>The account goes into collections in the first week of October (which means my credit will be destroyed). I will be leaving the startup after I sort everything out.<p>I need a way to make this $6k in about 12 days. My savings is shot. I have some consulting (WordPress, PHP, Rails) money coming in, but it's only $1k and might not even be on time. My co-founder owns a majority of the company but he's traveling so he's a bit unavailable.<p>This seems to be the "low" of that rollercoaster we call serial entrepreneurship. Thank you for your help, Hacker News.<p>EDIT: I'd just like to say that I'm using a throwaway because I'm pretty well known on HN, which makes this pretty interesting. I usually read these kinds of Ask HN posts and think "ouch"—funny to be on the other side.<p>EDIT: I'll respond soon, HN is giving me the "You're submitting too fast. Please slow down. Thanks." thing. I'm reading all your comments—they are not going unnoticed. And thank you.
======
tptacek
I don't get it. You're a Delaware C-Corp. _You_ don't owe anything, do you?

 _Don't_ take out a loan. _Don't_ restructure your debts. _Don't_ negotiate
with your creditors. _Don't_ sell your car. _Don't_ take a loan from your
parents. _Don't_ incur anything more than nominal legal bills.

Collect your contracts and take them immediately to your personal attorney and
have them reviewed before you attach your own personal credit to your
business'. Doing so is almost certainly unnecessary. You are probably just
fine.

You are a businessperson, but you're not thinking like one, and you are going
to get screwed. When your company's creditors worked out contracts with your
business, they understood that they were assuming the risk that the company
might go out of business and be unable to pay. That risk was priced into your
contract terms.

If people you've done business with are now telling you that you should stake
your personal finances on the debts of your company, then, absent some poorly
thought out up-front agreement you had with those vendors to the contrary,
you're being taken advantage of. Perhaps we'd benefit from hearing more about
who those people are.

As for the merchant account: well, the people saying you could be blacklisted
sure sound credible, and maybe you should listen to them. But please also note
that there are people on this thread saying you should sell your car or take
out a loan to satisfy someone else's debts, and take all the advice you get
here with a big grain of salt. It shouldn't cost more than a couple hundred
dollars to have an attorney explain to you ( _not_ your company, _not_ your
cofounder) that you are almost certainly not liable for thousands of dollars
of company debts.

~~~
andjones
Having a C-Corp, Delaware or no, does not remove personal responsibility.
Let's say I form a C-corp and accept client's money. The company then just
happens to spend all that money on me and not deliver any product or service.
I believe that is still called fraud and the individual is still liable.

That may be a harsh example.

Business is still about people. Regardless of whether an individual's credit
it tied to the company - and in this case I believe it is - these decisions
affect his future ability to conduct business. These decisions affect his
relationships with other people.

Telling everyone to take a hike may be a short-term solution. However, I
believe finding a win-win solution among all parties is a long-term win.

~~~
tptacek
Corporate liability does not shield you from fraud, negligence, or other
torts.

It most certainly does shield you from personal liability for debts the
company incurred in good faith (meaning: virtually all the company's debts).

People on this thread are giving what seems to me to be some spectacularly
_bad_ advice. _Do not_ throw your own personal finances down the toilet after
your company's.

~~~
andjones
That is correct. However does that make it a good idea to do so?

~~~
tptacek
Yes.

------
aresant
The answer is to restructure the debt, every single one of those companies
deals with failures and no-pays on a daily basis.

a) Most lawyers, especially extending credit terms in the startup field, will
carry over that debt with interest for years. Call and state your case, make
it clear it's no-pay right now either way, but you want to fulfill your
obligation in the further - say start making payments in 12 months.

b) RackSpace - you owe personally or through corporation? If personal, call
them and have the same conversation - speak with a manager and ask for payment
terms outside of normal, otherwise you have to default. If corporate consider
folding and walking away, corporate protection is there for a reason and even
though it's not a stand-up thing to do, Rackspace's world is littered with
bankrupt startups.

c) Visa & MC may be your big problem, getting blacklisted from merchant
accounts isn't the end of the world but certainly something to avoid. Also
nearly impossible to reach a human that can make decisions on terms. For a
startup they should have a 20% merchant reserve on your account anyways, how
far does that take you?

Bottom line, think 6 - 12 month terms instead of 12 day terms.

No reason at all you can't get there with the right amount of sucking it up
and pleading your case.

~~~
debtscrewed
Thank you.

a) Yes, and I'm dealing with a startup lawyer, at a very well-known Silicon
Valley law firm (this is when we had money). He's been very very patient with
our lack of being able to pay the retainer.

b) Through the corporation. It's registered under the Inc and has the EIN
associated with it. However, it also has my SSN associated as the primary
contact.

c) Well, I have a feeling that most of our credit card transactions are
fraudulent, being in the space we are in. (For example, someone charged $12k
on a card and tried to cash out to PayPal.)

I'll call up Rackspace and give it a shot. Thank you.

~~~
rwhitman
The last startup I was involved in, the guy who was running it talked to the
lawyers and got them to waive a good chunk of the retainer fees when it sank

~~~
debtscrewed
That's good to hear. I'd like to pay this lawyer in full for his services
(retainer minus un-used retainer balance). I don't like screwing people over,
even if they're expecting it to be a percentage of their clients that do that.
I don't want to be in that percentage.

~~~
jacquesm
Let me correct a misconception here, you are _not_ screwing people over,
customers having payment issues is a risk of doing business, they all decided
just how much debt they let you get in to.

If you had set out to create this situation on purpose that would be screwing
people over, now all that there is left to do is to shut down as orderly as
you can and to have everybody absorb an appropriate part of the loss.

~~~
netcan
To take that further. Don't be _that_ percentage by not acting like them.
Don't hide or promise things you can't deliver. You go to them. Lay it out and
work something out.

Everyone takes risks doing people. Inability to pay is one. Bad people is
another. The first is usually rarer and more manageable. The second is not so
bad. You can avoid being in the second category.

*Mixergy interviewed a bankrupcy lawyer a while ago. Maybe there's something useful for you in it. One useful thing I remembered: Discounted debt is usually taxable. Be careful you are not caught off guard. <http://mixergy.com/russell-demott-interview/>

------
danilocampos
An odd thought – you may be doing yourself a disservice by posting this
through your throwaway account.

If you are as well known as you say, your reputation might open some doors for
you. Some people who like you but assume you're busy doing your thing may be
excited to do some work with you that would solve your problem.

Moreover, relationships matter. So if you're a menschy guy, someone whose
brother works at Rackspace, for example, might take this through a back
channel on your behalf.

Pride is tough. Looking back on the last time I fell on tough times, my
biggest mistake was not being more transparent about my situation to people
who liked me. I felt weird and silly to be not successful, to have failed, but
I ended up making things harder on myself.

~~~
stuff4ben
I would hope that anyone who wants to help in this way would contact the
person behind the throwaway account. If your excuse was "they used a throwaway
account and therefore I won't help", I'd imagine you weren't going to help
regardless.

~~~
danilocampos
I think the "excuse" if you could call it that is people have no idea who this
is and have no way of contacting them.

Besides that, people choose who to work with based on reputation. I'm saying
if this person has banked credibility with people over an extended period, he
could probably pick up a few gigs from fellow HNers.

At this point, no one knows anything about this person, and so they have no
idea what skills or other unique value to ask for or trade cash for.

Besides, you're much more likely to go out on a limb for someone you know is a
good guy.

------
jimdotrose
First point of advice would be to take a deep breath and slow way, way down.
Everyone is pressuring you because they know you don't have cash and they want
to get paid first before everyone else out of a dwindling set of assets. Slow
the process down. Time - although it may not seem like it now - is on your
side. Don't sell your car, don't take on a consumer loan. Slow down.

Your debt, while big to you, is minimal to the people you are working with, so
they should be open to working through the issue with you.

a) Your lawyer, if it's a big firm, probably has a $2-3mm+ book, and a non-
collection of $3k isn't going to effect them one bit. S/he has an incentive to
work with you to come to an agreement on payment (if any) to maintain the
relationship. Treat them with respect and you will get it in return. Deal with
this bill last because it will be the easiest to manage.

b) $6k rackspace bill. Escalate the issue through the accounts payable
department by explaining the situation and telling them they aren't going to
get paid in full. If the first person on the phone doesn't get it, escalate to
the next level, then the next level, etc. The gatekeeper's job is to put
pressure on you to pay and create anxiety, which they seem to have done.

Once you get someone willing to work with you, fight to reduce the balance and
then extend the payables as much as possible. For the value of the balance,
figure out what rackspace could get by selling your receivable to a
collections agency and offer slightly more - if they get $.18 per dollar owed,
agree to pay $.19. Then, stretch the time period as much as possible.

c) Merchant account. This is where I would focus. This is your greatest
exposure. Even if you didn't sign a personal guarantee, this could follow you
professionally. Get on the phone with the merchant account holder and start
dealing. Get the balance down to their cost first (that shouldn't be hard),
and then see if you can grind it down farther. They have a loss reserve for
this exact reason. Be open and transparent and pay the least amount possible
while avoiding getting on the blacklist.

Bankruptcy (I'm not an attorney, so take this with the necessary grain of
salt) is the last resort. It's long and painful for everyone involved -
including you - and none of your creditors want to go there. Your creditors
have an interest in working out your debts with you without going to court.

------
jonpaul
We often hear too much about the successes of startups that we get caught up
on the glamor of it all. It's stories like these that bring us back to
reality. I'm truly sorry for your loss.

I'm sure that you've thought of this, but is there any by-product that you can
sell out of the company? Any IP liquidation?

Take care.

~~~
debtscrewed
Thank you very much. What's more is that I'm quite well known on Hacker
News—not as much as patio11 to have an article written about him, but enough
that a good amount of people I meet that read Hacker News say that they know
me.

Which makes it more stinging and 500% more embarrassing. But that makes it all
the more interesting, huh?

It's interesting. I licensed my technology as an SP to be used with this
company, so all of the IP is mostly, well, mine. I have thought about it, but
haven't reached a decision.

~~~
anigbrowl
Do you remember how the founders of TipJoy and, more recently, NewsTilt were
viciously shredded by an angry mob, right here on HN? No? Because failure is
nothing to feel bad about unless it becomes a predictable occurrence.

When you've got your breath back and blood pressure is approaching normal,
consider opening up about it. While you may not be able to talk about all of
it for legal reasons (eg it seems like your partner was rather dubious),
sharing what you have learned from the experience, what red flags you saw but
why they didn't seem worth stopping for etc. is valuable to many people. I'm
easily embarrassed myself, so I know it's difficult; but don't fall into the
trap of anticipating only the negative possibilities, and cutting yourself off
from the sympathy and support of people who like you.

Now, I don't mean 'Tell HN: OK it was me ohgodImsorry'; you don't need to
humiliate yourself! Take a long bath/walk on the beach/whatever, and let go of
the situation for a few hours. You poured your own money into it in an attempt
to keep things under control, and it was just just bigger than you were. What
happens next is in the hands of others, and you can influence but not control
it. Then write your creditors, mostly the same letter, and tell them what you
told us - you owe this much to these different people, you have lost a bunch
of your own money, [EDIT: I misinterpreted the stuff about your co-founder, as
if the person had bailed on you.], and you're sorry. Express your willingness
to pay it back ASAP, but stress that you wish to do it on a pro rata basis. Of
course every creditor would like to be paid first ahead of the others, but
making the same information available to all indicates you have nothing to
hide and is more reassuring than a non-credible promise to put someone first.
If you can afford it, a small check to each, even $25 or something, speaks
volumes.You might want to write to the IRS and the city or county that issues
your business license too - if you're not sure what to tell them, call and ask
what your obligations are. You may be surprised how helpful they can be. you
can call them today and get the letters out before you go to bed (go buy some
stamps if you need an excuse to get up and walk around). Then, sleep the sleep
of the just. Get up tomorrow, eat a healthy breakfast, and start composing
your 'How I lost a kajillion dollars and what I learned as my business
followed it off a cliff' post , on your existing blog, Posterous, wherever.
Throw in a couple of ironically entertaining pictures. It's not a funeral
notice because you're not dead - you are now a man or woman of experience, and
that experience has a value. Get that up over the weekend, realize people
still like you, and on Monday you get back to work.

Your job for the next week is to contact the creditors again, ensure they all
have the same information, and politely but firmly stick with the pro-rata
approach. Whether they agree or no, ask for their decision in writing so you
can send copies to the other creditors. By the way, since it sounds like
you're not in debt on your personal accounts, consider dropping by your own
bank and asking a manager for advice - since they won't actually be trying to
collect from you, they may be more forthcoming about how they evaluate
situations like that, and heaven knows they've had plenty of experience
lately. Allocate 50% of your time to debt service, and the other 50% to making
some new money. That can include chasing consulting/programming work, but your
existing business still has value. Call business magazines like Inc. people
like Andrew Warner etc., and say you have an interesting story - use your war
story post and the feedback you received on it as your raw material. Hell,
call Techcrunch, because they can't milk that SuperAngel scandal forever so
you might as well work the publicity angle and give them an interview. 'Life
after death' is a perennial story and even success junkies need one every so
often. How about your startup's business model? Your actual business may have
failed, but that doesn't mean the idea itself is without merit. Can you sell
the IP, or the brand, or the analytics, or the customer list, or the
suspicious transactions list? Some of these may be worth money, some not, but
all that information has value in some form. Just pretend you inherited it
from Uncle Debtscrewed and find that value. Can you make some value out of the
domain? Can you write a book?

Yes. You can do all of that, and more. Because although we all laugh when a
clown steps on a banana peel and falls flat on his face, what we applaud is
that he gets up again afterwards. So you don't have time to brood; you launch
next Monday.

~~~
pbiggar
> Do you remember how the founders of [...] NewsTilt were viciously shredded
> by an angry mob, right here on HN? No?

Well, actually this happened. It was tempered by lots of people being nice,
offering condolences, giving good insights, a few job offers, and even some
people looking to start up companies together, but lets not pretend the mob
didn't come out with their tar and feathers.

That said, I fully agree with the sentiment. Failure is perfectly acceptable,
a natural occurrence in a risk-taking industry.

------
jonpaul
As far as Rackspace goes, contact Rob (@kr8tr) and see if you can work out a
payment plan. He has a real passion for great customer service. Plus, he's a
cool dude.

~~~
lrm242
Seconded, thirded, fourthed, and fifthed. Rob is awesome. You can send him a
DM on Twitter or just call him. He puts his phone number on his website.

------
alain94040
If you did everything right, all your debt should be under the company's name,
not yourself personally.

Therefore, you're fine. The company can't pay. That's called bankruptcy.
Creditors are pros too, they should be used to it.

------
rjamestaylor
I work with Rackspace and would like to discuss your situation. Please contact
me by email - robert.taylor@rackspace.com or by phone - +1.210.548.5616.

Robert J Taylor

Sr Sys Engineer / Mgr, Realtime Customer Intervention

Rackspace Hosting

robert.taylor@rackspace.com

TF: 800.961.4454 x 501-5505

O: 210.312.5505

M: 210.548.5616

~~~
jrockway
I always love to see this sort of thing on HN!

I was going to say "this sort of thing makes me want to move my servers to
Rackspace", but they're already there ;)

------
lkrubner
I had a client who racked up an $18,000 bill with RackSpace, a debt which
needed to be restructured. I think it took a year to negotiate, but eventually
Rackspace let them go with just a $3,000 payment. So talk to Rackspace.
Explain the situation. You might be able to talk them down.

~~~
d2viant
How can someone rack up an $18,000 bill? Was that just over a single month?
I'm not a client of Rackspace, but I thought they billed out monthly, so if
you don't pay your bill I thought they would shutdown your service. What
happens, do they leave your service running and just let your bill compound?

~~~
qeorge
Rackspace is a little different than most hosts. They want you to sign a paper
contract, and will give you better prices if you commit for at least 12
months.

So its possible the OP had a good bit of time left on a contract, which he's
now on the hook for. It would also make sense for Rackspace to take a smaller
payment in such a case, as they wouldn't have rendered the services yet
anyway.

------
javery
Ok, if you formed an LLC and didn't sign personal guarantees with rackspace or
your lawyer then I don't see how you are personally on the hook for this.

~~~
debtscrewed
It's a C-Corp. (Edited: made an error and said S-Corp earlier) I'm not 100%
familiar with bankruptcy, but I'm assuming it'd damage my name as well as my
co-founder's, as well as going into stuff I don't want to get into (court,
etc.)

Rather have a way to pay back this $6k.

~~~
calloc
You are protected under a C-Corp, unless they can pierce the corporate veil in
court (unlikely if you didn't do anything you weren't supposed to do) you can
walk away and the only assets any of the creditors can go after are those of
the company. All of your personal assets are free and clear.

~~~
jacquesm
> My co-founder owns a majority of the company

Minority shareholder, so he's protected anyway, no way this could be laid at
his private door, unless there is outright fraud on his account.

------
SHOwnsYou
Have you called who ever is taking your account to collections and tried to
negotiate more time or a payment plan?

Explain that sending it to collections is bad for you and them. If you don't
have the money, then you don't have the money. But if also have to deal with a
collection agency then you'll have more stress to deal with. Also the
collection agency gets a cut of your (current non-existent) money owed.

If you can explain that is in both parties interest to keep it out of
collections and extend the deadline or work out a payment plan, you may be
more likely to get out of this situation without damaging effects on your
credit.

~~~
debtscrewed
Thank you for your suggestion. The only reason I wouldn't do that is because
Rackspace was very adamant about even the extension of the deadline (they
would only agree to a 5-day extension). But it doesn't hurt to ask, though it
may create a strained relationship between us.

~~~
Grinnmarr
It's their job to try and collect as much as they can. Even if your contact is
friendly and sympathetic, if they think you can pay on better terms than you
offer they will hammer you. On the flip side it is your job to be honest about
your situation and get them to accept terms that you can actually meet. Other
people have given better and more specific advice but the bottom line is they
will take what they can get. No hard feelings. Business is business.

------
jacquesm
It is in rackspace's own interest that you pay off, by sending the bill to the
debt collectors they're going to end up with less than if you strike a deal
with them, especially if the debt collection process forces you in to
bankruptcy.

In whose name is the rackspace account? Corporate? Private? Are you
incorporated?

Basically what you have to do is to come to an agreement where you
contractually agree to pay them an X amount per month + some interest on the
outstanding balance.

Make it clear to them that if they go the debt collection route that they will
likely get nothing at all but that if they will come to an agreement with you
that they have your word (for what that's worth) to make up for the hole.

How did it get this far?

I'm sorry to hear about the credit card fraud, every time someone here says
they'll do their own processing I keep hammering on that, so I'll use the
occasion to do it once again: Please do not do your own processing, use an
IPSP that has very thorough fraud controls and scrubbing in place or you are
very likely to get burned.

As for your lawyers fees, it sounds to me like he'll have to give you a
discount.

Your co-founder being 'unreachable' is not very nice, in for the good times
together, in for the bad times together, let's hope he turns up and will
shoulder his part of the problem.

Kudos for not going incommunicado like your co-founder.

~~~
nolite
Any recommendations for credit card processors for the rest of us out here?

~~~
jacquesm
Sure:

<https://epoch.com/>

<http://www.ccbill.com/>

<http://www.vxsbill.com/> (disclaimer, run by friends of mine)

Stay away as far as you can from IBill and e-passporte, jettis has also been
going through a rough period.

I hear good things about 'chargify', but I have no idea how well their anti-
fraud measures are.

My only problem with processing charges is consumer fraud, the people that
actually bought the service that consume it for months and that then suddenly
reverse 6 months worth of charges. This happens infrequently enough that it is
not a problem. It is also impossible to protect against in an SAAS or
subscription situation.

Actual fraud that makes it through is a fat '0'.

~~~
jaf656s
Chargify isn't an actual credit card processor, they pass through to your
gateway/merchant account. Their value is in simplifying the subscription
management and recurring billing.

------
protich
$6k in server fees?? Was it over a couple of months? I'm curious to know the
space your startup is in for that kind of server fees.

------
maxawaytoolong
It's no big deal. If you don't have the money you don't have the money... I
had a similar situation at my first startup where I was on the hook for
$36,000... not $9k. And everything worked out fine. You will have to
restructure the debt and it will probably nick your credit but that's not the
end of the world.

I will comment though that people are often confused about forming companies
to prevent personal liability. If you are the only person on the books for the
company, you're still on the hook for everything, whether you've got an LLC,
C-Corp, S-Corp, etc.

------
joeag
1\. even if a company does business as an LLC or C corp, etc. if there wasn't
much in assets when it was started (like cash), your corporate entity probably
doesn't holdup;

2\. most likely, you signed a contract with Rackspace personally right?

3\. as for the merchant/credit card account - most require a personal
guarantee anyway

So, first of all - I am sure your lawyer will defer or write off a bunch of
that bill - happens all the time, especially if you have already paid a number
of previous bills.

Rackspace is probably doing what most creditors do - acting as aggressively as
possible. If they turn it over to collection, they are already looking at a
huge writeoff (collection agencies get a nice percentage of whatever they
collect and usually also have authority to write down the debt substantially
in offers in compromise). So when push comes to shove, if you offer them a
payment plan, I bet they will go for it or at least counter offer. Offer them
$1,000 now, and $500 a month for 10 months say - that's full payment of the
account. If you feel lucky, offer $3K, $1K now and $500 a month for 4 months.

The credit card account is going to be sticky - because unlike rackspace who
made a profit margin on the $6K you owe, the credit card company has probably
already refunded the $$ to cardholders that it "paid" to you - the fact that
you describe it as "huge" doesn't help - I would assume it may be the majority
of all payments advanced to you by the merchant provider. Again, you can
probably propose a payment plan which has a good likelihood of being accepted.

Good luck.

~~~
Muzza
Could you elaborate on point 1?

~~~
joeag
If a corporate entity is created and funded with very little in the way of
assets it can be disregarded in a legal proceeding. This is called "piercing
the corporate veil".

There are other factors a judge or jury will weigh as well, but assets are
among the most important.

This is pretty common sense if you think about it - although most people
(especially those who read the "incorporate for $99 and protect yourself from
creditors) don't realize it.. just because you sign some papers and create a
legal entity the law isn't going to allow you to stiff people and evade legal
obligations.

~~~
Muzza
I am aware of the corporate veil and the piercing thereof, but I'm not really
convinced that assets are among the most important things a jury would like
at. And surely it varies among industries (so a real estate investment firm
would require more in assets than an internet startup in order to be
considered "proper").

~~~
joeag
Actually, having assets appropriate to the business type is one of the key
factors in determining whether the corporate entity will be respected and you
are correct that it differs for a RE company and an internet startup.

There are plenty of citations to case law to support this but I am too lazy to
go find them to post in this reply.

------
donohoe

      My co-founder owns a majority of the company 
      but he's traveling so he's a bit unavailable.
    

Well, he/she better get on the next plane back and help sort this out.
Seriously. If things are this bad they need to do their part.

They need to be making phone calls regardless of where they are.

No offense, but it sounds like if the company was on a downward spiral it was
a bad time to take a vacation.

------
arimat
The whole point of an LLC is to have limited liability. If you haven't been
involved in any fraud or misrepresentation, nobody can go after your assets
except in some very specific cases.

You need to speak with your lawyer, or do a little research.

------
joystickers
Can you go into detail, perhaps outside of HN, as to how you got to this
stage? It could be a valuable lesson for others.

------
bherms
1) Try to buy time. Debt collectors will work with you. 2) Restructure as
aresant said. 3) Set up payment plans with the people. Even if you owe
$10,000, telling them you're broke and sending $50/month until you find more
money usually will get them off your back. It shows you're serious about
paying and is a good faith sort of thing. 4) If all else fails, remember, it
could be worse. Having bad credit sucks, but isn't the end of the world.
Protect it if you can, but your life isn't over if your credit gets screwed.
Trust me on this one.

~~~
dangrossman
It's not about credit.

Any time a merchant account is closed for cause, such as having too high a
chargeback rate, the underwriting bank has a contractual obligation to place
the merchant in the TMF (Terminated Merchant File) and MATCH list. Both the
company AND the names/SSNs of the principals of the company are listed. This
is intended to protect other banks -- so that a company with a history of
payment fraud or other problems can't simply go bank to bank as each account
is closed.

Being on TMF/MATCH can prevent you from opening a merchant account for future
business the rest of your life. Very few banks, almost none in the US, will
open a merchant account if any of the owners of the company are listed.

~~~
bherms
Ahh, I see, I didn't know about that. Thanks for the info! :)

------
mortenjorck
The other comments here will help you much more in the immediate timeframe,
but here's my suggestion for after this is all over:

Write. Nothing will give you catharsis and perspective on this unpleasant
experience like writing. Consider sharing your experience with the community;
your lessons learned may end up saving someone else from a similar situation,
and while learning from a failure is great, teaching from a failure is even
better.

------
nikosdimopoulos
The first thing to do IMO is review ALL the legal documentation that you have.
This means:

1\. What is your role in the company. Are you just another employee or does
your contract 'tie' you in some way with the company's assets and liabilities.

2\. Is there anything in the contracts that you signed (if applicable) that
relates directly to you personally? If yes concentrate on that one and nothing
else.

3\. Just because you poured money in the business, it does not necessarily
mean that you are responsible for its liabilities. Review the documentation
with a lawyer as to what your exposure is towards this situation.

From the looks of it, the merchant account is your 'weakest link'. Follow the
advice of others here by talking to the merchant and sorting something out.
Chances are that the future is not as bleak as it seems now. There are always
choices.

Remember: Ask and you shall receive. Asking the relevant parties for
extensions, better terms of payments etc. is not bad. The worst thing that can
happen is for them to refuse.

Good luck and stay strong. There is always light at the end of the tunnel!

------
CatalystFactory
If you formed your entity correctly (I assume this is where your $3k debt to
your lawyer came in), you likely can declare bankruptcy for your company and
take no personal liability.

You might want to find family and friends who can loan you the money without
interest.

Can you sell the domain?

Just curious, how did you get so much debt from your lawyer.

Hope it works out and best of luck.

------
mcdowall
Reading this rings very true to home for myself and I completely understand
your situation having gone through and similarly going through the same.

I used to live and breathe my start-up, be passionate about the startup scene
and thought my project was on the fast track. Debts mounted up and deciding
who to pay first / last is somewhat stressful. I personally focused on paying
the areas that would potentially come back to haunt me in my career first, I
then restructured and negotiated settlement amounts. The surprising aspect for
me was that negotiation is entirely possible, the small amount that firms
expect to receive from insolvency is significantly lower than a settlement
plan with yourself.

I won't go over my specifics as this is about you, but if you ever want to
chat or just some advice in how to deal with this on a personal / mental level
let me know.

------
swombat
Is this a limited company? Seems pretty fucked.

I don't know what the usual legal proceedings are to declare bankruptcy, but
this is why they have bankruptcy laws and limited company.

Speak to a bankruptcy lawyer. Presumably all of this is your company's debt,
not your own personally, and you have not committed fraud or done anything
illegal, so hopefully you're in the clear personally. It may even work out
that your cofounder is the one who ends up with a black eye on his credit
record if he's the majority shareholder and ends up being the person named in
the bankruptcy.

You haven't specified what country you're in. I'm guessing US. From the little
I know, bankruptcy protections are pretty great over there. In the UK, if you
take a company that you're a director of bankrupt, you aren't allowed to be
director of another company for 5 years.

~~~
debtscrewed
It is a limited company, and it's registered under a Delaware C-Corp.

I'm not familiar with the details of bankruptcy either. Will this damage my
name and the name of the company?

Well, I'll probably be the guy named in bankruptcy, since my cofounder is in
the UK.

Yes, I am in the US. Ouch, that sucks, see directly above.

~~~
rwhitman
You should edit your post if you can to mention that its a C-Corp. From what I
know the C-Corp should be protecting you from personal liability, but I'm sure
other commenters here have more expertise

~~~
enjo
Just for reference: The C-Corp does provide a pretty heavy liability shield.
However, alot of these contracts where likely personally guaranteed. It's
nearly impossible to open a merchant account for a young company without
personal guarantees from the principles. The lawyer likely required personal
guarantees on the retainer as well.

It's part of doing business really. Creditors really don't like corporate
protection (for obvious reasons) so it's pretty easy to get yourself into a
situation that they're seeing... although the high number of charge-backs is
something of a head scratcher.

------
EGreg
Work something out with Rackspace. They will be happy to not report you to the
credit bureaus. That leaves about $3k to pay to the lawyer. And maybe you can
work something out with him too so he doesn't report you to a collection
agency, which is probably a hassle for him anyway.

------
andjones
First, take a deep breath.

Second, approach the situation honestly. Honesty does not mean you need to
approach everyone on your knees. Most of your creditors likely do not know
what situation you are in right now. Many people actually enjoy finding
creative win-win solutions. You never know unless you ask.

Third, good luck. Looking back at the low parts in my life, they all worked
out one way or another. Without challenge and without hardship, I would not
appreciate what is good in life. Learn what you can and always remember to
smile :)

------
beentherebefore
ironically, you're in the dominant position for negotiation. the creditors
will try to lean on you (and possibly quite hard), but they're just trying to
walk away with as much cash as possible. start throwing the 'bankruptcy' word
around, that should cool off most creditors for the time being. communicate
your situation to them and don't make any commitments until the dust has
settled. don't pay anyone until you consult a few lawyers. if that takes
longer than 12 days, so be it.

remember, if you do pursue bankruptcy (which may not be a bad option for a
failed business), the judge will ultimately decide who gets paid what amount.
no one creditor can walk away with a disproportionate share of the assets
(subject to debt rankings). this removes all leverage for subordinated debt.

your first call needs to be your current lawyer. explain your situation and
ask for a referral to a bankruptcy lawyer. your next calls should be to your
network for more legal referrals. as these lawyers for a 30 min consultation
off the clock. if they want your business, they'll give it to you.

most importantly, don't let '12 days' pressure you. your creditors can wait.
they may get loud, but they can wait.

------
maxharris
Is there any way you can turn your experience with evil people defrauding your
credit card merchant account into something that you can build a startup on or
consult with? Or was it just a minor avoidable error that balooned out of
control and that other people aren't likely to have trouble with?

How did the fraud occur? Who did it, where were they, and what did they do
technically to steal from you?

~~~
yock
Indeed, I'd be interested in hearing more about the fraud as well; however,
I'd imagine that this may be an embarassing part of the story for the OP.
There is mention of a large number of chargebacks, which to me indicates that
a large portion of his legitimate clients believed that a service was not
rendered or product not delivered.

------
famousactress
Does the startup have any assets/IP that are saleable? I agree with
SHOwnsYou.. I'd try to buy some time.

------
vaksel
negotiate with all of those companies to lower the total, then get one of
those 0% apr for 9-12 months.

Use the checks they give you, to pay down your debt.

This way you'll be down to 4-5K and you won't pay any interest on it for a
year...which should give you plenty of time to get back on your feet

------
Mentat_Enki
Never use your own money! Borrow and lose other people's money. It's the
American Way! _wink_

(Note: I am an American, and thus reserve the right to poke myself in the
eye.)

(While this was meant to be funny, it's really meant to be "ha-ha serious" not
"ha-ha funny". Start-ups are by-nature risky endeavors. Putting your own
financial well-being on the line in this fashion is as foolish as tight-rope
walking without a net. If you've got a C-corp your personal assets should be
somewhat protected. Make sure to do your homework on this...)

Oh, and last of all: Don't Panic. You can always flee to Europe or elsewhere.
;)

------
uvince
I think this is exactly what Lending Club is for. You'll pay 9-12%
interest/year, but you'll get a loan based on credit score, personal reasons
and your ability to tell a story on why/how you'll pay it back:
<http://bit.ly/lending-club>

~~~
mahmud
Even shorter:

<http://lendingclub.com>

------
huhtenberg
Talk to your parents, perhaps?

(downvoting, eh?) Talk to them about _a loan_.

------
whalesalad
Sell your car?

------
k3dz
time to start a new category.. "Help me, HN"

------
ahoyhere
1\. Own up to you who you are. If you treat this like a dirty secret, you're
going to spend the rest of your (online) life hoping that nobody finds out
"the real you" and what your life/work is "really" like. People who fail
collosally, and have the guts to share that, are usually held in great esteem.
People who hide their failures til they're found out by someone else, on the
other hand, don't get such respect.

Trust me on this one - I've fucked up at least as big as you have.

2\. Use your network, name, and rep to get a couple freelance contracts.
Explain that you're willing to work really hard, so long as you can find a
couple people to pay you up front because of these extenuating circumstances.

People LOVE to watch somebody kick the ass of difficulties. You will find 2
people on HN to pay you $3k for freelance work. Heck, I would, if I knew who
you were.

I think it's honorable that you're not looking at just abandoning the debt
because you can, but, as a last resort, if you're legally protected behind
your incorporation paperwork, do it. There's no reason for this to wreck your
life.

(And really, seriously consider my advice. Own it. You'll feel better and
nobody will think less of you.)

------
lzw
Note something about collections: Collections agencies are not a party to a
debt and thus they have NO LEAGAL RIGHTS, and further they do NOT have the
right to "destroy" your credit, or even to affect your credit. You owe money
to the original party, and you only have to deal with the original party. You
need to protect your credit by sending a "Cease and desist" to any and every
collection agency that writes you about any debt. Send this by registered
mail, return reciept as they are notorious about committing perjury and
claiming they never received such letters. When you have proof, you will have
them on the legal hook if they report the debt to a credit reporting agency or
participate in any collection activities, including claling you, after
recieving the C&D. You can find forms for these online... Here, I'll attach
one below.

The original creditor maintains all rights, and they can sue you, or they can
contact you, or attempt to work out an arrangment. By turning it over to a
collection agency they have indicated that they don't think they can collect
and are writing it off, which is fine as this is one of their options. But
don't let your credit be hurt. Send the C&D to the collection agency, and they
are prevented from reporting the debt on your credit report. Often this is
also effective in gettign the original creidtor to actually talk to you so
that you can work out payment terms.... and since they already wrote off the
debt they should be willing to accept good payment terms (like 10 years, no
interest, monthly payments starting in 6 months after you send them a $200
initial good faith payment... that's what I'd propose.)

Collection Agencies pretend like they have the authority and will pretend like
they can sue you, they often pretend like they are law offices.... but
remember their job is basically to intimidate you or trick you into paying,
anything to get you to send a payment. But under the law, you have no contract
with them, you never agreed to deal with them, and they have no legal rights.
The original creditor can sue you, but if they were going to do that, they
wouldn't have turned it over to a collection agency in the first place (Which
keeps a large chunk of what they collect.)

So, don't let your credit be damaged-- be on the ball with the C&D and you can
not only keep collections from harassing you, but force any creditor who
really wants their money to work with you on terms.

[Your Name] [Your Mailing Address] [Your City/State/Zip]

Certified Mail, Return Receipt Requested # [Insert the Certified Mail Receipt
Number here]

[Insert Date of Mailing]

[Insert name of collection agent, if available] [Insert name of collection
agency] [Insert address of collection agency] [Insert City/State/Zip of
collection agency]

REF: Account # [Insert either the original account number or the collection
agency's account reference number here]

Dear [Insert name of debt collector calling--if available--here]:

1\. You are hereby notified under provisions of Public Laws 104-208, also
known as the Fair Debt Collection Practices Act, that your services are no
longer desired.

2\. You and your organization must CEASE & DESIST all attempts to collect the
above debt. Failure to comply with this law will result in my immediately
filing a complaint with the Federal Trade Commission and the [Insert your home
state here] Attorney General's office. I will pursue all criminal and civil
claims against you and your company.

3\. Let this letter also serve as your warning that I may utilize telephone
recording devices in order to document any telephone conversations that we may
have in the future.

4\. Furthermore, if any negative information is placed on my credit bureau
reports by your agency after receipt of this notice, this will cause me to
file suit against you and your organization, both personally and corporately,
to seek any and all legal remedies available to me by law.

5\. Since it is my policy neither to recognize nor deal with collection
agencies, I will settle this account with the original creditor.

Give this matter the attention it deserves!

[Sign your name here]

[Insert your name here]

------
mkramlich
Perhaps the government can bail you out. Just call your friends inside the
Treasury Department, etc. Cake. ;)

------
johnarleyburns
This is why you should be using Google AppEngine and free providers, so you
don't get on the hook like this.

------
palehose
Unless you are specifically looking to avoid responsibility for this debt and
are planning to let your startup sink, I don't understand why you wouldn't pay
for your debt with a credit card.

------
betaPass
If you are getting the message: "You're submitting too fast", and you need to
reply soon, just access HN through web proxy,create an acc, and submit! :)

