

How to Split Early Profits in a Bootstrapped Software Startup - jshajan
http://www.jeffstanden.com/blog/2007/12/03/how-to-split-early-profits-in-a-bootstrapped-software-startup/

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vaksel
Splitting all profit between founders early on just seems very wasteful to me.
You should be reinvesting that money into your company, instead of wasting it
on paying salaries.

On day one you should decide on the minimum amount it'd take for you both to
be ramen profitable. And that amount should be considered as an expense. Then
out of the remaining profit, you should decide what % will go back into the
company, and what % will be given out as a bonus.

So if for example you decide on $1,500 and 10% - on a $10,000 profit month,
$3,000 will go to salaries, $700 will be split among founders as a bonus, and
$6,300 will be spent on buying additional ads.

And if you for example have a 3x ad return. Meaning your ads make you $3 for
every dollar you spend.

1st month you'll make an additional $18,900 that you wouldn't have had
otherwise. Out of that $1,890 will go as bonus, and $17,010 will be spent on
ads for next month.

If that trend continues(lets say your product is only limited by exposure),
2nd month that $17,010 will turn into $51,030, out of which $5,103 will go as
bonus and you'll have $45,927 to spend on ads for next month.

And on the 3rd month, that will balloon up to $137,781, out of which you can
get $13,778 as a bonus and a whopping $124K to reinvest.

So in 3 short months, you'll make an additional $14,471 for yourself and an
additional $124K for your company, that you wouldn't have had otherwise.

Early on every penny counts. If you withdraw an extra penny on day one instead
of buying ads that would net you 3x return, you are losing a ton of money

Month 0: $.01

Month 1: $.03

Month 2: $.09

Month 3: $.27

Month 4: $.81

Month 5: $2.43

Month 6: $7.29

Month 7: $21.87

Month 8: $65.61

Month 9: $196.83

Month 10: $590.49

Month 11: $1771.47

Month 12: $5314.41

~~~
ChristianPerry
I agree. I ran a company that started making serious revenue its second year
in operation. My partner and I made the choice then of paying ourselves
salaries, keeping a considerable portion of the revenue in our business bank
account.

It was one of the best business decisions we ever made. The income that we
saved is paying for our living expenses while we work behind the scenes to
launch our new startup. If we had pocketed the cash, I doubt we'd be in as
strong a position.

~~~
DataWhore
I am working on a new vetnure with some friends, payed for from the cash
flow/savings from their other project. It's the best system. Eat out less,
build more things.

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jstanden
@vaksel

You're also right that if you're reasonably comfortable with planning on a
200%+ return on an ad, your founders will likely agree to invest in the ad
rather than take the split. But it's best to have (and propose) that clear use
for the money opposed to making people sacrifice out of principle.

The later point of my post was that founders should be able to agree to their
"buffer" and shared expenses. What you don't want to do is reserve money based
on the philosophy the company _COULD_ use it better, but not actually execute
on that. You can quickly demoralize quality people by saving up a war chest
for ads, while people are trying to do their best work on "ramen" draws after
the release (and reality sets in).

When intelligent people know they get a percentage of the profit at weekly
checkpoints, they can do the math on how their time is being spent in the
present (opposed to thinking it will rain money at the finish line; which
maybe it will, but it's rarely that easy).

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jstanden
Hey guys! I wrote the linked post.

Very early on, you are right; it doesn't make sense to pay founders before you
pay the bills and invest in your product/marketing. But when you maintain the
bootstrap mentality beyond the very early days, and when you add people who
aren't programmer types, you need to think about incentives rather than
sacrifices. The fuel that keeps people going very early on is thinking about
launch/release, but realistically very few things achieve overnight success.
Organic growth can take a while, and my point was by giving people a fair,
scalable taste of the profits (at a weekly interval, out of real profits) you
can keep morale and creativity up.

-Jeff

