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Mistakes You Should Never Make (sethbannon.com)
646 points by sethbannon on July 24, 2014 | hide | past | favorite | 328 comments

As internal counsel for YC, it was very upsetting to learn about the ongoing troubles at Amicus. It was particularly distressing to hear about the payroll tax issues, given that YC has funded excellent companies that specialize in accounting and payroll for small businesses, such as Indinero and Zenpayroll. The tone of Seth's post suggest that YC has supported Seth in all of his recent actions. That is not true -- YC supports its companies through good times and bad, but we do not support illegality. For example, in paragraph 3 Seth writes that PG looks for founders that are "naughty" and writes about levels of rule-breaking. YC's principal tenets are to "make something people want" and "talk and listen to users/customers" -- YC may promote a culture of disruption, but that does not mean neglecting payroll taxes and breaking rules.

"The tone of Seth's post suggest that YC has supported Seth in all of his recent actions. That is not true -- YC supports its companies through good times and bad, but we do not support illegality."

FWIW I didn't get that impression from the post. Here's what I assume he was referring to:

"4. Naughtiness

Though the most successful founders are usually good people, they tend to have a piratical gleam in their eye. They're not Goody Two-Shoes type good. Morally, they care about getting the big questions right, but not about observing proprieties. That's why I'd use the word naughty rather than evil. They delight in breaking rules, but not rules that matter. This quality may be redundant though; it may be implied by imagination."


I think not paying taxes would obviously fall in the "rules that matter" category.

Good to see YC step forward on this. I'm not a HN regular, but I've been following this thread all day because I have a friend who worked at Amicus, and several others who have worked with their software. I know there are always many sides to any story. I wasn't there, just like most of you weren't there, but all I can say is Seth's version of this story does NOT fit with what I've heard, and everything I've heard has been from honest, cool people who - unlike Seth - don't have a history of lying about really important shit.

Seth absolutely deserves to have a forum to tell his version of the story, but I find it more than a little annoying that after everything he's done, he's still able to leverage his position as a YC Founder to ensure that his version of the story gets more attention than anyone else's.

Based on everything I've heard, I'd say this post is essentially about admitting to lesser crimes so the world forgives him before we even know what he really did or did not do.

I'd urge the media powers that be to try and get some former employees, investors,customers, etc., on the record. And if they don't, then all of us should probably just move along and forget about this guy. Sounds like he already duped a lot of people into believing in him - I for one don't intend to be his next victim.

I'm curious; what have you heard that makes these sound like lesser crimes? I feel like from my reading of this, it sounds like he's admitting to being pretty dishonest in a lot of ways (though obviously weasel-worded), so I'm curious what more we're not hearing about; if this is supposed to make him look better, then whatever's left must be pretty bad!

I don't want to spread rumors, and everything I've heard has been second hand at best. I just know that there were a lot of good people at Amicus, and a lot of good organizations relying on the software, and now they are all screwed.

> Seth absolutely deserves to have a forum to tell his version of the story, but I find it more than a little annoying that after everything he's done, he's still able to leverage his position as a YC Founder to ensure that his version of the story gets more attention than anyone else's.

I'm really interested to hear about the other side of the story. Any links?

The person I know who was at Amicus would definitely never go on the record about this stuff, so no, no links. All I'm saying is that I'm shocked by how many people here are willing to take this guy at his word without hearing from anyone else, given the kind of pathological lying he himself admits to in his blog post.


Who was the first victim?

The company who received the feature they were told that they would have?

Is it wrong to employ Machiavellian tactics in order to help LGBT groups further advance the rights of those oppressed?

No way to know who the first victim was, because behavior like this usually starts when people are very young. Also, you set up a HN account JUST to respond to my comment? hmmmmm... I created an account just to comment on this story, because I know people who were affected by this. Clearly you have a connection to this as well.

Thank you for this note, good to see YCs position on stuff like this.

But to clarify the point the OP made about being 'naughty' had to do with a different part of the narrative, the one where promises were made to customers, not the part where they do not pay the withheld payroll taxes (the illegal component).

That's YC's public-facing position, almost certainly not its real position.

Virtually every corporation I know regularly lies. Structurally. This is because speech is an act, and they pursue actions which maximize profit (and/or marketshare); and deal with competitors who have the same basic incentives. If they didn't lie, they'd often be replaced by those who do.

I'm not exactly in the YC alumni camp (even though I know plenty of them) and I think that you're way off base here.

YC has made a couple of such statements in the past and from what I've seen they stand by them both in further communications and in actions.

I recall PGs writings about installmonetizer as one example, and a few others which I won't be repeating here to avoid tearing open old wounds.

In general, of all the start-up accelerators out there YC is by far the most transparent about what kind of behavior they are proud to be associated with and what kind of behavior is definitely un-acceptable and they are not afraid of making that known, to past, present and future YC alumni alike.

If you don't believe me read: http://www.ycombinator.com/ethics/

And then come up with instances where YC has continued to back a company that violated those rules willingly.

The OP is by his own admission clearly in violation of a whole bunch of those and has a number of very hard choices to make (resignation being one option).

Fine; you think I'm off base, but that's not my problem. :)

Contrast your emphasis on a couple statements for PUBLIC consumption, vs. the article's claim: "One of the big values of Y Combinator was that we were able to hear strictly off-the-record stories of many successful startups' WFIO [‘We’re Fucked, It’s Over’] moments."

In any case, many of us have been inside corporations, and observed the clear dynamics.

I have a few of those WFIO stories myself and I would not air them because there is no use crying over spilt milk and I like to protect the reputations of my co-founders and employees alike.

That's perfectly ok. You're not required to spill the beans or air your dirty laundry in situations like this.

In fact, the whole thread here is because the OP decided to come clean (for some value of 'clean') about all this, and as with any communication of this nature it has multiple components: communicating the state of affairs, trying to control the narrative and performing a service for other entrepreneurs in terms of warning them for pitfalls they might not be aware of.

It should not be lost on you that you are using that as a way to discount the rest, but you have no insight there at all so you're not in a position to draw such conclusions.

If you have information that is not currently public and that corroborates your view then more power to you but all I see is a huge assumption. You are extrapolating from the companies that you know to a company that you apparently do not know. Just like people companies should be evaluated on a case-by-case basis, generalizations are usually pointless.

No problem if you disagree; just a couple observations:

- any "shock" people have about corporations/investors routinely lying is hopefully fake. Or at least brief.

- simply read the charts and see how transparently YC misleads those who don't think through basic statistics: http://www.washingtonpost.com/blogs/the-switch/wp/2014/03/04...

Now we're solidly into threadjacking territory, we're not going to make this about gender in start-ups. You can argue about that until the cows come home, it has nothing to do with the subject at hand, which is the activities of the founders of YC and their relationship with YC. To know more about the subject you want to pull this thread into you'd have to know a ton more about the YC applicant pool than is publicly available and since there is not much good any company can do in this respect it's considered a minefield. For the record, all the people working for me are females, the start-ups that I've founded all had at least one female in the founder group and yet none of that proves anything. I'm sure you could make a pretty graph out of that.

Didn't discuss gender; just pointed out that Washington Post called out YC's blatantly misleading stats.

(Since you're passionately discussing oppression, hopefully one day women will work for themselves, not "working for YOU". That is, needing to rent their bodies to guys like you, via labor markets. Anyway, thanks for everyone's time.)

I've worked for women and there are two women currently on my payroll. Would you rather they were unemployed? And as to them working for themselves I fully agree with you, which is exactly why I am assisting one of the two with her entrepreneurial ambitions. You're really totally out of touch here and I seriously wonder what it is that you are trying to achieve with all your un-founded mudslinging.

Also, you don't speak for everyone here, just for yourself.

As tlrobinson and jacquesm noted, I certainly didn't mean to imply that YC in any way supports companies not paying payroll taxes -- as I advise in the post, companies shouldn't cut corners when it comes to that stuff.

It's ironic to me that payroll taxes (which theoretically exist for the employee's benefit) have forced a promising and growing company to lay off staff. Have you tried hiring a tax attorney to negotiate with the IRS? Often they will waive some of the penalties and allow payment plans.

This I find hard. This thread is a major eye-opener, quite heavily dividing the HN world. No one thinks Seth/Amicus did well here, but there is a world of difference between supporting a company or founder and condoning illegality.

This smacks of hanging someone out to dry. And that bothers me, unless you have much more backstory with Amicus than is obvious here.

This thread has shaken me - I initially sided with OP because he sounded a great deal like me - and I respected the effort such honesty takes.

I am not sadly a man of great personal integrity. I vow never to lie but only because I have found it leads to more stress and trouble than the alternative. Always being honest I am working up to - ChuckM's grandfather sets a high bar.

Ultimately I have no insight into this case, no idea who's story is more close to reality. But I value openness and admitting of mistakes - it makes my own stumblings more bearable.

So I respect Seth for opening up here. He may well lose this company, he may well suffer prosecution for back taxes. And he should take his licks. But if he has dealt openly and honestly with his investors and employees he will I expect be back again, backed by investors who will this time insist on a firm of good accountants

Incompetency in administration may be a crime, but it's more forgivable than lying.

The naughtiness he is referring to is clearly not the mistake they made in not paying payroll tax. He mentions later that it is about offering features that did not exist yet, which is very common.

I think that you misunderstood his post (even though you may have more information than I do).

The end note is indeed ambiguous, but the body of the post of the post is more detailed and I had understood that he was talking about the alumni rather than YC itself.

I’ve been most surprised by the outpouring of support from other entrepreneurs (mainly from the Y Combinator network) who heard we might be going through tough times, and reached out just to let me know they were there for me.

Besides that, the he mentions YC and pg as inspiration, throughout the post, but there's no mention of an active support.

What more, he claims that the taxes issue was an oversight rather than an willful decision. It is thus irresponsibility rather than naughtiness, which requires intentionality. Also he doesn't try to justify it as pg-defined naughty behavior.

I am happy that you think I misunderstood his post (and yes I have more information than many about the situation). When I read the post I thought it was implicit that YC supported Seth fully. That is not the case. There are mentions of YC throughout the post, and a couple of references to the YC network. I was hoping to clarify that the YC network doesn't automatically include YC. My one example may have been misconstrued and there are many parts and sides to this story. As long as it is clear that there is not unconditional support at YC for Seth's handling of the situation, then that is all that matters.

You could have at least called the founder and asked what he meant, instead of bashing him here. You could have asked him to add more clarification in his blog which might have ensured that what your pointing to is not implied.

You guys are growing and its important to scale your communication as well.

That had to be a tough article to write, thanks Seth.

The thing that really stuck with me is the 'technically true' aspects. Growing up in various places around the world I encountered a number of people for whom their motto was 'its only illegal if you get caught!' The advantages of this motto were very apparent as a teen, you could run a stop light at 11:30pm, there was hardly anyone around, and you could be home by curfew. You could use your parents car if it was back where they expected it to be when they next needed it. Sort of the ultimate Ferris Bueller.

And then I had as an influence my Grandfather, who was a US Attorney, and who valued his integrity over his own life. I think of him as sort of the other end of this spectrum.

I asked him about his unwillingness to do what others have done (at the time it was drive faster than the speed limit on an empty road) and he said, "Charles, the world is full of pain and anguish, when a man lives by a code he can walk among that pain and anguish and help right its wrongs without being burdened by having contributed to it." (well that is how I remembered it, there was probably a story about hunting in there too) and I didn't really understand it until much later.

The defining moment for me was one time when I was riding with my stepfather when I was 12 or so. We pulled up behind a truck that had a "Call us if this vehicle is driving badly" or the equivalent sticker and I blurted out how fun it would be to call and say the driver was terrible.

He immediately said something along the lines of "So you think it would be fun to get that guy fired?" and the impact was basically immediate. It was a lesson that actions have consequences, something that it seems like so few people seem to actually appreciate.

Interesting about your grandfather. Mine taught me a similar integrity lesson when I was a kid. Back when there were payphones I would always check them for spare quarters. One time when I was with my grandfather I checked a phone that has broken and dumped ~ $6 in change out. I pulled all the money out super excited about my find. He explained it wasn't mine and when we got home he mailed the local phone a check for the exact amount.

"I asked him about his unwillingness to do what others have done (at the time it was drive faster than the speed limit on an empty road) "

The above (parent comment) as well as your comment "I pulled all the money out super excited about my find. He explained it wasn't mine" ... well, I can't agree that it teaches the proper lesson, even to a child.

Forgetting whether he is even right "it isn't yours" (I could argue against this) I think that's exactly the type of rigidity that teaches someone not to appreciate the nuance that you need to actually make real decisions in life. It just teaches black and white and unfortunately things aren't typically black and white.

I'm reminded of a time on "The Apprentice" where a candidate who was favored by Trump told him something claiming to be honest and thinking it was going to get him ahead and instead Trump "fired him". Forgetting we are talking about a TV show here (and obvious drama) life is full of nuances which you have to navigate. Being "too" honest can also send a message that you are not flexible and willing to consider the circumstances.

As far as "drive faster than the speed limit on an empty road" (the parent comment) the devil is in the details. Driving 56 in a 55 mile per hour zone is not a problem. In fact driving 60 isn't and at least where I live 65 isn't either. Cops typically never give tickets without some slack. And there is a reason for that.

If I interviewed someone and they claimed to not drive over the speed limit I wouldn't give any bonus points for that I'd actually take points away.

To me (and with all due respect to the parent commenters grandfather) when I hear things like this I think something is trying to prove honesty a bit to much and (once again not to imply the parent commenters grandfather is such a person) that is the type of person I actually watch out for sometimes.

"To me (and with all due respect to the parent commenters grandfather) when I hear things like this I think something is trying to prove honesty a bit to much and (once again not to imply the parent commenters grandfather is such a person) that is the type of person I actually watch out for sometimes."

99.9% of the time, that type of statement is more of a sign of your personality and less a sign of others'.

In reality, though, the main point that you missed is that in a world made of shades of gray, the only person you can ever truly rely on is yourself. If you don't have scruples and you don't have honor, you don't have anything.

That's the basic message. Trying to water it down with nuance and personal opinion about honesty in today's world is simply grasping for straws to justify choices made in your own life.

That's a lot more confrontational than I intended. Those are not meant to be the personal attacks they come across as.

Some people have honor in everything they do, they're good people. Some people have honor in only the major things they do, they're good people as well, but there may be some questionable choices when it comes to minor things like finding cash on the ground or speeding. Some people have no honor; avoid these people.

That allows for your nuance, but still allows for a code of honor. Kids need to be taught that. Act honorably, understand that not everyone adheres to your codes, and understand that even if they don't, they're not automatically bad people.

"In reality, though, the main point that you missed is that in a world made of shades of gray, the only person you can ever truly rely on is yourself. If you don't have scruples and you don't have honor, you don't have anything."

Well let me put it this way. I don't think you understand my point about nuances and that I (once again) don't feel any of this is black and white.

As an example the honor that I might display, and scruples I might display, for an individual are not the same that I might display for a corporation. If I hired someone, a hacker, to do programming, I would be much more lenient because of a person relationship and especially because of the knowing that my actions would have a large effect on that individual. Otoh if I had a project that was being done by "IBM Global services" I would absolutely angle things differently if things weren't done right. I wouldn't care about that company not getting it's $10,000 (arbitrary obviously).

If an individual were doing a project for me and made a mistake and under billed me I would point it out. If IBM did the same I wouldn't.

As it happens I have seen various behavior (on the other side, say vendors) of both individuals and corporations over a long long time that I have spent in business. And each situation really is different.

The thing my grandfather taught me was that you live with all of your decisions for the rest of your life. When you make decisions which put other people at risk, you take on the risk that you are going to make someones life harder, possibly much harder. What is perhaps even more important is that no amount of "I'm so sorry I did that ..." will ever undo it. Sometimes its little things, like taking the last serving because you thought everyone had eaten, sometimes its big things like deciding that home is close enough that and you're sober enough to get there safely. They are all decisions we make every day. And as I've gotten older the weight of ones I wish I had made differently doesn't get any lighter. You can lie to yourself about your choices, rationalize them, but that doesn't change them either.

I didn't understand any of that when I was younger.

Very well said. The thing I have noticed is that the selfish decisions and the lies seem to last longer in my memory than the immediate benefit I got.

And I agree -- with me this knowledge has also had to come with age. Maybe others do better.

Unfortunately, some people never come to understand that. Being able to recognize consequences before acting (and changing behavior as a result) is, IMO, the definition of wisdom.

> I didn't understand any of that when I was younger.

Nothing to be ashamed of though, plenty of people never learn that particular lesson.

That is exactly what I couldn't figure out how to say.

> Otoh if I had a project that was being done by "IBM Global services" I would absolutely angle things differently if things weren't done right. I wouldn't care about that company not getting it's $10,000 (arbitrary obviously).

Call it "nuance" or "gray area" all you want, but that is just amoral. You have no idea what situation led to the problem and what consequences your breach of contact will have. The project manager may have been operating on very little sleep and sent over the wrong version of the invoice. At the end of the quarter, they may lose their job.

I would 100% point out the discrepancy and pay them. When I decided to do business with them, I already determined that the terms were fair. To act otherwise when the bill comes in is entirely dishonorable.

Do you actually have a good example of nuance, or are you just trying to legitimize bad behavior?

I've chosen to never speed because it reduces my cognitive load.

Nobody speeds all the time. Even people who speed a lot will try to slow down for speed traps.

So everyone who speeds even those who speed only every now and then have to be constantly making a choice for when to speed.

They must constantly assess whether the benefits of speeding in this specific moment outweigh the disadvantages. There are dozens of variables: how much quicker will speeding be? will I be caught? is it safe to speed on this road at this time?

Much easier to ignore all that and just to drive below the speed limit.

"I've chosen to never speed because it reduces my cognitive load."

Never? Never speeding also means not always keeping up with traffic which might be flowing at a higher rate of speed. Consequently you are chancing a greater risk of an accident by not keeping up with traffic and not speeding.

Not exactly. Those that are speeding have accepted the higher risk of accident in exchange for getting to their destination slightly faster (if at all). The choices of the speeders have externalities in the form of a higher risk of accident for all other drivers around them, regardless of others speed. The drivers who obey the law bear none of the of the responsibility for that increase in risk. If you want to argue that speed limits should be raised because everyone is breaking them anyways, I think that is a fairer point of view. But to blame people who are following the law for the externalities caused by those breaking the law is absurd.

Driving at a rate faster or slower than the flow of traffic increases the risk of an accident more than an equivalent increase in speed. Here's a detailed article about it: http://priceonomics.com/is-every-speed-limit-too-low/

The link is pretty weak evidence.

> “We all speed, yet months and months usually pass between us seeing a crash,”

This is a stupid argument. Do you really want to be in a crash every few months? Roughly the average person has a 1% lifetime chance of dying and a 10% chance of serious injury in a car crash. To me these are pretty high numbers.

> that sign won’t make people drive any slower

Where I live, speed limits are zealously enforced - loss of licence for a third offence in two years - and people do comply with them. So yes a sign won't do it but you can get people to comply.

As usual the US seems to find the worst solution: overly restrictive speed limits (55mph) combined with lack of enforcement. This causes large divergences in speeds, which is apparently dangerous.

The article seems to confuse the merits of driving slower than most traffic, with the merits of slowing traffic as a whole down. They are very different things. If most people on the autobahn are doing 110mph then one driver doing 55mph would be dangerous. However slowing everyone down to say 60 mph may be a much safer overall situation.

Your personal risk is lower when you drive with the flow, even if that flow is faster then speed limit. This is kind of collective action problem, if most drivers restrict their speed, everyone is safer. If only few of them restrict themselves, those few are not much safer.

The drivers who obey the law do not bear responsibility for the increase in risk, but neither they raised their own safety.

Sorry for the delay in reply.

I live in Durban, South Africa. Lots of people speed here and sometimes the fast lane will be moving faster than the limit. But I don't think I've ever been in a situation where all of the traffic is moving faster than the limit.

Is it common for all lanes to be moving faster than the speed limit where you are?

"I've chosen to never speed because it reduces my cognitive load."

That's a utilitarian approach which is completely orthogonal to what this thread is about.

I think you really missed the mark on what they were trying to illustrate.

It's not following societies rules for the sake of it. It's following your own internal compass, _and_sticking_to_it_ regardless of if it benefits you now or harms you. Theirs just aligned with certain things you obviously don't value in a person.

Side note: You sound as though you think speed limits are arbitrary. You might want to look up the dynamics of braking cars, the percentage of accidents where speeding is a factor and consider the outcome of an accident where it's found that you were doing 65 in 55 zone.

Two thoughts:

1. Was that really the phone company's money? My first thought on hearing that story was that the $6 in change was from people putting money into the broken phone, realizing it was broken, and leaving without their money. Does the phone company really deserve money that the phone 'eats' when it doesn't deliver the service that people are giving it money for?

2. If you sent the phone company that $6 today, they would file criminal charges, because that cheque is an admission of guilt for stealing money from them. (Much in the way that, "I stumbled across a security flaw," is responded to nowadays)

Two thoughts in response to your thoughts:

1. Sure, it's possible the phone company didn't "deserve" the money (perhaps, as you say, the phone failed to make calls). But it's just as possible the phone company did "deserve" the money (and that the phone made calls but refunded the change). There's no way to know what happened for certain. However, what is certain is that the kid did not earn or "deserve" the money.

It also becomes quite dangerous to reason based on who "deserves" something. Am I entitled to rob any person who has not lived a moral life by my standards of morality? (No.) :)

2. I think this is hyperbole and a total strawman. Mailing $6 to a phone company will not result in a lawsuit. Do you actually think this would happen? I worry that attitudes like this come from the selection bias in the media, where rare outrageous stories are reported far more often than commonplace stories, resulting in shifted perceptions of reality. If you would care to bet or fund me, I would be happy to send $6 to a phone company. I highly doubt that criminal charges would be filed against me.

Your thoughts seem to be trying to rationalize taking money that isn't yours. I think this is precisely the attitude that his grandfather was hoping to avoid instilling in his grandchild.

(P.S. I mean no offense or snobbery, in case any came across.)

Interesting juxtaposition there:

" what is certain is that the kid did not earn or "deserve" the money. It also becomes quite dangerous to reason based on who "deserves" something. "

My intent was not to say that the child "deserved it." I was commenting on the indirect implication that the phone company deserved it. By taking the money from the child because they "don't deserve it" and giving it to the phone company, he's implicitly stating that the phone company deserves it.

"2. If you sent the phone company that $6 today, they would file criminal charges, because that cheque is an admission of guilt for stealing money from them."

Uhm, yeah, pardon my French, but that's complete bullshit.

That's a beautiful quote from your grandfather. Thanks for sharing.

My father once told me that what separates people from animals is that people have honor.

People without honor, well...

This brings up an excellent side point that I taught my children... that stealing is not taking something that belongs to someone else, it is taking something that does not belong to you.

It is a subtle, but important, distiction that is often used as a rationalization.

Edit: This really belongs on the child comment.

That's not really true, though.

If I'm walking in a forest and I pick up an apple, prior to my picking it up, it did not belong to me. Upon picking it up, it now belongs to me. You can claim things that did not belong to you prior to said claiming.

I get what you're saying but it only applies in situations where everything is already owned by someone.

That's too technical of an argument and takes away from the idea that Tactic is trying to convey. Most people don't find that apple-picking from a forest is stealing.

My take on Tactic's explanation of stealing is that the guilt you should feel from stealing should also be from having taken something that isn't yours from someone, instead of just the guilt of depriving someone from the thing you stole. Although both perspectives are good to have, taking something that isn't yours is a better framework to think in so you can avoid the grey areas of stealing.

>having taken something that isn't yours from someone

I agree that this is likely what he meant. It's a much easier way to get children, who likely are too young to have a complex moral framework, not to steal or even come close to it.

However, we're also talking about adapting that lesson to adults, who should have that moral framework. By maintaining the black and white view, you're depriving yourself of the full use of your rights, or potentially contributing to the denial of someone else's.

Children actually innately understand some of this; if you're not using your blocks, why can't I use them? In a more adult sense, if you're not using your land, can I use it?

It's a bit of a tangent, but I think it might be just as important to impart the lesson that you should use and maintain the things you own or claim, or potentially be subject to their loss. There are significant advantages to understanding the communal claim on many types of property, and they don't just apply to individuals but the community as a whole.

(edited for clarity)

Great story. Reminds me of this scene from the wire: https://www.youtube.com/watch?v=VyoqNyH7HZA

Of all the financial mistakes you can possibly make running a company, withholding payroll taxes and then failing to remit them is probably the worst. Be thankful you caught this before the liability exceeded your available funds, because company operators are apparently routinely held personally liable when there's a shortfall, and I'm not sure that debt is even dischargeable in bankruptcy.

What's worse, minor versions of this mistake turn out to be easy to make; I've seen (much smaller, much more easily fixed) incidents in multiple companies with things like state taxes and unemployment insurance. So: you can't assume this is a mistake that won't happen to you.

Without making any value judgements about the operations of this particular company, one valuable lesson from the post is: do not ever use the Bank of America Payroll feature.

Unremitted payroll taxes can come with a one hundred percent penalty, and you can be liable for that penalty even if you had no knowledge of the failure to remit. Payroll tax screwups are the scary story big startups tell to baby startups at bedtime. Shudder.

As a former transactional/commercial litigation attorney I too would see this issue regularly.

One interesting "hack" I would see clients do regularly as owner/employees, they would minimize their own salary to avoid payroll taxes, maximizing their distributions (distributions are not subject to payroll taxes). Unfortunately for them the IRS accounts for this hack, and if an IRS audit finds the salary isn't reasonable then those amounts will be subject to payroll, social security, medicare, potentially higher income tax, and moving forward affordable care act taxes plus penalties and interest. I personally hate this because there is no bright line rule as to what a reasonable salary is subjecting all business owners to the mercy of the IRS.

I am surprised this would happen to a YC company, not that YC is in anyway responsible, but I figured YC would be in a position to offer various business services (payroll, legal, tax, insurance, ect...) at extremely low cost. For example, I personally solicited YC and offered to provide Delaware incorporation/registered agent/annual compliance services to any YC companies at a discount which without the discount is already cheaper than legalzoom.

It's a hack, and it's also unfair. S-corp company owners get to inhabit a very small part of the economy that, due to a loophole, gets a dial that turns some of their liquid compensation from "salary" to "investment income". That's baloney. I'm glad it's an audit flag.

It's not much of a problem in the UK. A great many of our clients (and ourselves) use the standard dividends + minimum wage method of paying themselves - that is, the ones who own their businesses, i.e. have not taken funding. HMRC accepts this method as a way for business owners to minimise their taxes. As I recall, the argument is something along the lines of "I am paying myself a salary for the basic director duties but effectively working for free on the company day to day, and collecting parts of the earnings as an owner."

It works fine and is very common for small businesses in the UK. I guess this goes to show how contextual accounting advice can be.

On that note, I'll add that I'm ever so glad that in all my interactions with them HMRC have been polite, friendly, supportive, helpful and nothing like the abusive business murderers that the IRS appear to aim to be - even when I fucked something up that was obviously my fault. I don't understand why the IRS feels that they need to be such assholes about everything. They should see their job as what it is: an essential part of the infrastructure that supports the economy and, indirectly, supports businesses. Their role should be to make business easier, not harder.

I've never had an unpleasant interaction with the IRS. Unlike virtually any other creditor I've ever dealt with, the people I've talked to who actually work for the IRS have been courteous and helpful. I'm not the only person who's said this. The IRS has acquired a personalized reputation for being jerks, not unlike that of Customs, but which totally doesn't square with how the agency actually acts.

I say this as someone who once had a pretty decent unexpected 5-figure liability that I had to work out with them.

I also don't feel like zealous enforcement of unremitted payroll tax is particularly abusive, since that's essentially describing companies stealing from their employees.

I think I'm a bit older than you. They were "jerks" back when I started in business. But things have changed as you've pointed out.

I had a run in with the labor department at my first company. I wouldn't exactly call them jerks (or nice) but I was able to get them to cut in half a 5 figure amount they assessed me (a lawsuit was filed) by having a personal meeting with the local office head. Without an attorney. After I cut the deal I then said "oh one more thing can I have 5 years to pay this back?". And he agreed (I didn't need the 5 years, it wasn't a large amount, but I thought why not?)

Well, that's good to hear! This reputation the IRS has makes me worried about the idea of some day operating in the US. It's good to know that they actually employ human beings rather than attack dogs.

From what you describe, they sound much like HMRC.

And yes, withholding payroll tax (or VAT) and not passing it on to the government is pretty crappy. HMRC is typically understanding if this is a few months or even a year down the line and they think the business will be able to pay up - they frequently agree payment plans for such things - but three years without noticing kinda takes the piss.

I get the impression (and I could be woefully wrong) that the IRS, kind of like the USPS, has an awful reputation that was justified some decades ago, has turned it around because of that awful reputation, but inertia means the reputation persists long after the underlying reasons have been remedied.

Actually as an S-Corp owner all the corporate income is taxed as REGULAR INCOME. It doesn't become a capital gains tax -- which is what I assume you mean by investment income.

However the US government wants you to also pay Social Security and Medicare tax, which you only pay on employment income. Therefore they force you to take a "reasonable"[1] salary from the company. Everything else left in the company's account at the end of the year is your non-employment income.

It avoids double taxation. It doesn't put you in a lower tax bracket.

1. Reasonable is determined by them.

It's taxed as regular income, but the premise under which it's exempt from the payroll taxes every other worker has to pay is that it's not normal income, but rather the return from an investment in the company.

For people in our industry, it's hard to see a definition of "reasonable" that would be financially beneficial. You start a tech company. You pull $100k out every year, putting you right smack in the middle of the income distribution for experienced tech people. But because of a loophole, you get to reclassify $50k of that $100k as a distribution, and not pay FICA on it. To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient.

People obviously do it and get away with it. I'm glad it's an audit flag.

Sure, but you just mentioned an unreasonable salary. If the median is $100k, then that's reasonable, and the person only gets to avoid SS and medicare on any additional profit.

I operate as an s-corp and pay myself a reasonable salary, matching that of the salary I could get in the current job market in the area I live in. Anything I clear above this is only taxed with my regular taxes.

If I was running a C-Corp instead of an S-Corp, I'd get my $100k salary, and any extra would have been taxed at the 30% corporate rate when it was taken in, then the 20% capital gains when it's distributed to me as profit.

Exactly. You could pull in sometimes 250-500K as a consulting company, specially if you outsource some aspects of projects. S-Corp is ideal for that.

The FICA cap is 115k.

The SS side of FICA is 115k. Medicare has no limit and is at 1.45%

> To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient.

I don't know. What salary would you take for your honest-to-god dream job?

Is your "dream job" one where you are paid a pittance while the company owner makes a tidy profit from your endeavours?

Many people will take a pay cut for their dream job, but very few are willing to be exploited in the process.

If a company owner is taking a very low salary in order to maximise company profit (and minimise tax) then they (as an employer) are exploiting themselves (as an employee) to do so.

I might take a $50,000 salary to fly gliders all day. But no matter how nice of a job it is, I'm not going to take a $50,000 salary to program computers all day, because I can get a job in that field that's only marginally less nice and pays way more.

There are multiple very large public companies in the US which boast that their CEO earns a salary of only $1. See: http://en.wikipedia.org/wiki/One-dollar_salary

Is there some difference between the type of corporation which makes it acceptable, or could the IRS potentially go after all of those individuals?

The companies probably pay payroll taxes for these individuals on a higher "salary" number that is reasonable for their position.

In NL we actually do have such a 'bright line', a very reasonable amount that anybody in the hot seat is required to pay out of their business on an annual basis as a salary.

If the business is not doing well you can negotiate that down to ridiculously low levels provided you do not borrow from the company at the same time. That last bit is the bit that bites, many business owners already have a line of credit with their company from the founding days and they'd have to pay that back before they can reduce their salary.

On the whole that arrangement works well though, and the one time that I needed it I found that the tax people were very much understanding of the situation and offered a few suggestions that helped making things easier.

If all government institutions were as reasonable as the tax office in my dealings with them this would be a much better country.

"In NL we actually do have such a 'bright line', a very reasonable amount that anybody in the hot seat is required to pay out of their business on an annual basis as a salary."

That is the floor, it's not a 'bright line'. If the field of that particular business the 'usual salary' is higher, you have to pay yourself that, and you're at the mercy of the tax office in the same way, because they decide what is the 'usual salary'. Also, a director is not allowed to pay themselves less than their employees, for example.

That said, it is true that it is fairly easy to get into contact with an inspector and get advice on how to proceed.

In the U.S., if you pay yourself the wage base limit, then you at least won't be delinquent for any social security taxes:


So people doing high value software type consulting are probably playing games if they take that much compensation but oops on fully paying those particular taxes.

How is $1 salary justified to IRS? There are a bunch of executives who have $1 salary [0], including Mark Zuckerberg. I really doubt it's considered reasonable.

[0] http://en.wikipedia.org/wiki/One-dollar_salary

You don't have to justify low salaries to the IRS conceptually, you just can't use them to avoid paying payroll taxes.

I would assume that companies like Apple and Facebook have competent tax teams that make sure their obligations are fulfilled, even if that means paying payroll taxes on a portion of the stock-based compensation to their executives.

"How is $1 salary justified to IRS? "

What they report to the IRS and what they show on financials could be 2 totally different things. Entirely possible that they are paying taxes on a higher salary.

Base Salary is just a tiny component of an executive's salary. It is a PR move. Executive salary is made up of Cash component (which includes Base Salary & Bonuses), & Equity.

Equity constitutes towards almost 99 percent of an exec's salary. There are short term equity plans and long term equity plans. The equity payouts are generally in millions.

Companies have to release a DEF14A (30-40 pages) each year to show Shareholder's how much the Top5 Execs were paid each year.

"Unfortunately for them the IRS accounts for this hack, and if an IRS audit finds the salary isn't reasonable then those amounts will be subject to payroll, social security, medicare, potentially higher income tax, and moving forward affordable care act taxes plus penalties and interest. "

My experience over time with many business people has shown that since we are not talking about a criminal action but an action that will result in only penalties, interest etc. it is probably a chance worth taking.

This is a frequent occurrence in business in other areas. You have to take your chances and you determine the chances that you take by looking at your comfort level (which is different for everyone) with the potential downside and probability of that downside happening.

So how do the 1$ salary CEO's get away with this its an obvious tax avoidance scheme that I would have thought the IRS would be all over it.

You can even get in trouble when you don't owe anything.

Moving in and out of W-2/Corp-to-corp status many years ago, we set some consultants up on W-2. Then we changed up the mix, went back to just me, and I went on W-2 with another consulting firm for a while.

Got a letter from the state tax guys. Even though nothing was owed, we were supposed to file forms with all zeroes on them. There was a fine, yadda yadda.

Unfortunately, logic, reason, and common sense are not a reliable guide here.

> You can even get in trouble when you don't owe anything.

Yep. I recently got a Texas sales tax certificate for my unincorporated side business. Even though I am not doing anything yet, because I have the certificate every quarter I have to log in to a state website and check a box that says I had no sales. Not doing to on time will cost me $500 per incident (I think).

Ok I'm using the bank of America payroll feature and now I'm scared. :)

However, are you sure that this doesn't work? The B of A system I am using (in California) calculates payroll taxes, and then even lets you submit them electronically. It also nags me constantly for forms I am supposed to submit to both CA and the US IRS.

I have used ADP for quite a while and it is not expensive and they don't forget anything.

Trying to file your company's taxes on your own is like trying to represent yourself in a trial.

Wisest advise in this thread. My mind boggles at the idea that apparently there are investors who give money to people who do their own taxes.

I won't even do my own income tax, I send that to our lawyer.

"Without making any value judgements about the operations of this particular company, one valuable lesson from the post is: do not ever use the Bank of America Payroll feature."

There are actually all sorts of gotchas in business that happen as a result of some assumption that you make as far as a process being carried out that never has happened. Using BofA wasn't the sole problem here it was being asleep at the switch and not checking that something had actually happened that didn't.

When I pay my taxes (various real estate, business, personal etc.) I typically will actually look for and printout the cancelled check from the bank showing that the check actually arrived at the destination and was deposited.

The example I would use is the long standing thought in backups that you need to actually test your backups, [1] and not assume that they will work when you need them.

[1] For a certain Mac that I am backing up I just bought, for example, 2 - 3tb hard disks. One will be offsite, one will be onsite. One will be a disk clone (super duper) one will be done by Apple's time machine. Also, the two different 3tb disk were purchased from two different vendors. One is WD and is Seagate. [2] I will periodically test both backups to make sure I can boot from either if needed. This isn't for super critical data but for a large collection of photos and videos. (And there are more than one clone of the data for that matter).

[2] Theory being that buying 2 of the exact same 3 tb's (at the same exact time) could come from the same batch and be defective.

IMO the biggest problem here was not accurately forecasting liquidity, if they had done that they would have seen within two months that something was badly wrong. Excess cash in a business that can not be explained should be just as worrisome as having too little. The latter is an indication that someone is raiding the till in some creative way, the former that you are not paying someone that you should be paying, which can lead to the sudden demise of your business if the creditor has a long enough arm.

No matter how small your business you should at least have a general ledger and a liquidity forecast running 6 months to a year into the future.

"Excess cash in a business that can not be explained should be just as worrisome"

Really good point. As it happens one day recently I questioned my wife why our personal account had so much money in it.

It turned out that she had transferred her money into it that should have went into another account.

This was after correcting problems where she had payed some personal bills out of our account because the bank bill paying "default" for her was set to our joint account rather than her own account.

So she switched it so default bill payment now = her account. So now I have a different problem. She pays our bills out of her account. Which (in addition to the above mentioned wrong deposit) has created even more havoc.

A couple of months ago, there was an HN discussion about "business friendly places", and if I am not mistaken, your pov was that the US is the most business friendly place; And when I mentioned that the US tax system is worse than most, your response (again, if I recall correctly) was along the lines of "it's just a line item in your expenses, make sure you pay an accountant to take care of it". And you're very consistent... however,

Don't you think the ease with which you can get into this kind of trouble (which may not be dischargeable in bankruptcy, and which may IIRC become a criminal matter) should factor into the "business friendless" score of the US? In every other tax regime I'm familiar with (several European and the Israeli one), everything which is not outright fraud gets you no more than a small fine.

The logic here appears to be that since the employee is deemed to have paid the government on the day that an employee receives his or her paycheck, the employer is holding those funds in a trust for the government, to be remitted quarterly. The government appears to believe in Monteiro's strategy: "Fuck you, pay me." So you -- as an officer, an employee who pays bills, possibly a board member, or possibly other related parties -- can be personally liable if, for example, you used money from that presumptive trust to pay any other bill.

   Although Internal Revenue Code Section 6672 includes officers, partners, and 
   employees, it does not exclude other individuals or firms that that can be 
   held liable.  The IRS will first try to recover payment from the responsible 
   persons with the most liquid assets, but will also concurrently hold as many 
   people as possible liable, each with joint and several liability for this 
   100% penalty.  There is no presumption of innocence in trust fund tax 
   situations. In Skouras v. United States, the court determined the assessment 
   on a responsible party is presumptively correct and issues relating to 
   willfulness could be resolved at the summary judgment level. The individual 
   has the burden of disproving by a preponderance of the evidence, the 
   existence of one or both of the elements that is willfulness or 
   responsibility. [1]
here [1] are some interesting horror stories:

   Aside from the persons normally thought of as being responsible for these 
   taxes (CEO, CFO, President, Secretary, Treasurer, partner), the courts have 
   given fairly wide latitude as to which entities or individuals the IRS can 
   assign responsibility to. In 1987, the United States Supreme Court held that 
   the third party liability for trust fund taxes was affirmed against a lender 
   who paid employees’ wages with the knowledge the firm did not intend or 
   would not be able to make timely deposits of the trust fund taxes. In 1985 
   the courts found that a lawyer, who had power of attorney from the owner to 
   operate a car dealership, was found liable for the 100% penalty. In another 
   case the IRS determined that workers were incorrectly classified as 
   independent contractors and assessed the 100% penalty to the principals of 
   the firm. In a 1984 Revenue Ruling, the IRS stated that a volunteer member 
   of a board of trustees for a charitable organization can be held liable for 
   the 6672 penalty. In 1978 the United States Ninth Circuit Court of Appeals 
   determined that a general contractor was responsible for the trust fund 
   taxes not remitted by a subcontractor. An accounting firm was held liable as 
   a responsible party because it had failed to remit a client’s trust fund 
   taxes and paid creditors other than the Internal Revenue Service. The IRS 
   deemed the friend of a business owner responsible because he paid some 
   utility bills for the company, extended loans or pledged collateral on loans 
   to the company.
   Imagine the shock when the IRS levied the Individual Retirement Account 
   (“IRA”) account of an officer of an S corporation and then included the 
   proceeds of the levied funds in the taxpayer’s Adjusted Gross Income for the 
   purpose of determining his earned income. The IRS used the constructive 
   receipt doctrine to conclude the amount levied from an IRA was a 
   disbursement – it had to be included as income. The taxpayer was further 
   refrained from deducting it as a pass through loss or a necessary business 
   expense. This is just a sampling of the many cases involving withholding tax 
   liability and the long arm reach of the IRS’ “responsible party” strategy. [1]
Like I said -- you can pretty fairly characterize this as, "Fuck you, pay me." Where I to own a business, I would strongly consider creating segregated accounts to hold the funds owed to the government. In fact, it would be nice if I could create a way to just pay the government every other week along with payroll so I would have no owed-to-the-government funds on hand to create temptation...

[1] http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2306636_code...

In Finland the tax office creates a "tax account" for each company. You can transfer money into the account for withheld payroll taxes, social security payments, value-added tax, etc.

It works just like a bank account (except you can't withdraw money from it). They have an online service where you can check the tax account's status and activity, so it's easy to keep it in balance.

This eliminates the need to retain any money that is actually owed to the government. When you pay an employee, you can pay the withheld tax and social security fees at the same time into the tax account.

Weirdly, I feel for the IRS here.

Early on in the days of the Internet, I would actually call up spammers and try to help them understand why they should stop. 80% of the people were confused small businesspeople who were glad somebody gave them the straight scoop. 20% were weasels who would say or do anything as long as it got them what they wanted.

After a few decades of bullshit excuses from irredeemable idiots, I would also end up in the "fuck you, pay me" category. Because nothing short of being as inevitable as death would be enough to get inveterate weasels to actually pay, and nobody wants to be jerked around by weasels.

It sucks for the rest of us, though, because it turns reasonable mistakes like this into land mines.

I can't see how failing to pay hundreds of thousands of dollars in taxes because you can't be arsed to make the basic comparison of "what am I paying" with "what am I supposed to be paying" can be described as a "reasonable mistake".

Do you believe this person was literally unable to reason? Or acting from fraudulent intent? Is this perhaps a mistake that no other person has ever made?

If you're not saying yes to one of those, then I'm not seeing what category applies other than "reasonable mistake". I agree it's a noob mistake, but a lot of businesses are started by noobs.

I merely believe that he was not reasoning when making this mistake. That's all "unreasonable" means.

Given the rest of the story and his replies, I'm also inclined to believe that the mistake was ultimately due to lying to himself about the importance of bookkeeping and how fast funds should have been spent. But even absent that, "unreasonable" is a totally reasonable word for this.

No, the word for "not reasoning" is "unreasoning". "Unreasonable" means something else. In the phrase "reasonable mistake" I mean it in the sense of "ordinary or usual". E.g.: http://legal-dictionary.thefreedictionary.com/reasonable

It is not unusual for new or small businesses to just wing it on accounting for a while and then hire an accountant who has to tidy things up. (If you don't believe me, ask any small business accountant; my pals have story after story like this.) If we take him at his word, him thinking that the payroll service was handling the withholding is also reasonable. And him assuming everything was jake unless somebody was yelling at him is not just reasonable but typical of first-time entrepreneurs. The main unusual thing here is the scope of error and consequences, but startups are all about rapid increase in size, so that's not unusual in context.

Of course, this could also be fraud: he could have known for years that he wasn't paying withholding, hoping to make it up later. It could be that he actively avoided thinking it through or was willfully careless, which would make it negligence. But as he presents it, it's a reasonable mistake. You can see more about exactly what this means if you look in legal sources for "mistake of fact".

That said, I think your skepticism about his story is reasonable. That his partners have both quit after losing confidence in him would make me unsurprised if this turned out to be fraud, not just an honest but titanically stupid mistake.

This is why you use a payroll company that takes all the money for you for each paycheck and handles the quarterly filing for you -- no "extra cash" hanging around. I think this is called "Full Service Payroll" and can even include insurance against tax liability. I assume they make money on the float, but I'm not sure.

Yes, my company has used SurePayroll and it works exactly like this. They charge fees, as well as presumably making some money on the float.

The fee is around $40 per month (per employee, I suspect) and it is money well spent. There are pains associated with the service - the reporting is not entirely transparent, and when things go wrong with the automated systems I have gotten odd letters from my tax authorities which needed to be turned into support tickets (which were then handled promptly). But I would never use anything less than a payroll service. If my payroll gets more complex I might upgrade to a bookkeeper with well-documented payroll experience (at a cost which would, I suspect, be considerably higher than $40 a month), but I'd never try to do payroll myself, for reasons which are amply attested in this thread.

Also, accountants. +1 for accountants.

That's very dangerous, no matter what the reputation of the firm.

The thing to do is to use separate accounts for reserves like these and to pay directly into the coffers of the tax man, lest the party that you do business with unexpectedly goes bust (they do) and you end up being liable again for the same amount of tax that you already paid to the payroll company. Don't for one second think that you're off the hook because you paid the payroll taxes to some other company.

The best arrangement is where they tell you exactly what is to be reserved and when it is due and you do the payments. That's how I've been doing it and it works flawless, never a problem (so far!).

As an extra bonus, you get to check the amount against the last couple of payments you made and you'll spot any big fluctuations before things get out of hand.

This may be good advice in NL, but it's sort of diametrically the opposite of best common practice in the US. Payroll being handled by payroll firms is the norm in the US, and the stories about terrible payroll withholding screwups hurting companies are, as far as I can tell, invariably the result of people trying to handle this themselves, paying "directly into the coffers of the tax man".

Does the American system have any provision for payroll companies that fail to fulfill their obligations?

(segregated accounts per client, accounts only usable for remittance of the salaries or taxes with the payroll company then taking out its slice when everything else has been done?)

I remember the Accupay affair and that took a lot of employers by surprise, and even though 'best common practice in the US' may be that payroll firms are the norm, at least in that particular case the culprit was definitely the payroll company and not any one of their multitude of clients. And there were strong indications that Accupay was not the only company that pulled that particular stunt.

All of the companies affected were held liable and had to pay (again).

You remember the affair of a tiny payroll processing company in Baltimore? Is there some news source about them that isn't in the local Baltimore media that I missed? I had to give Google News a custom search range just to find those local hits.

If that's the kind of firm you're talking about, I agree. Don't use tiny fly-by-night payroll firms. Just use SurePayroll or someone like them.

I'm serious: that's a good point you have. When I said "the norm is to use a payroll firm", I should have said "big payroll firm". There are a lot of little firms out there, and I wouldn't feel safe using them either.

I remember the Accupay name because a friends business got caught up in that and unfortunately his company did not survive.

Having a ton of friends in the US means that sometimes I get requests if I can help someone out on short notice, in that particular case there wasn't anything I could do. (I was relatively short on cash at the time but even if that had not been the case I probably would not have stepped in.)

Like all the clients of Arthur Anderson[1]? You don't get much bigger than the Big 5.

1. https://en.wikipedia.org/wiki/Arthur_Andersen

Did Anderson even do payroll?

Regardless of the company always keep the payment certificates/receipts

Yes, dealing with the tax authorities directly is usually more complicated (might be simpler for a sole proprietor/small number of employees)

It's totally understandable how these companies get themselves into this situation. Your employee gets a paycheck of $1000 and in addition to that you send off $700 in payroll tax. Well, if your bank account is low you can pay the employee his/her regular amount but delay paying the tax. Your employee doesn't know as long as you manage to pay the withholdings before the end of the quarter (or worse case end of the tax year).

This is known as "borrowing against payroll tax" and is pretty much universally known as a terrible idea! It does happen, though and a business might be dangerously low on cash, but has big amount coming in (from a consulting job, investment, etc). It's just very risky because if you get yourself into a position where you can't pay the bill, then you will be screwed just like one of those companies you mention.

But - if you just simply use a payroll service and always pay the withholdings without fail then you won't have that temptation and won't get yourself into trouble. No need to try to hide your money or something so the IRS can't get it.

You've just described a company willfully failing to remit payroll taxes. That's not just a terrible idea; it's (often) a crime, and it's easy to see why: you aren't really "borrowing", so much as you are "stealing" money that doesn't belong to you and hoping you can pay it back before anyone notices.

As long as you pay the taxes when they are due, it doesn't matter if you collected them with each paycheck or pay a lump sum at the end of your tax period. Smaller businesses are allowed to file (and pay) quarterly.

The smart thing to do is just withhold the tax with each paycheck. But, if you're a small business you do have until the end of the quarter to come up with the money. As I said, it's risky and generally a terrible idea. I was just explaining how companies come to find themselves in this position.

The right strategy here seems to be "just use a payroll company".

yup. I'd be astonished if board members didn't require this to be done because they could be held personally liable.

We've had issues with our state taxes because we changed from an LLC to a C-corp and even though our lawyers took care of everything at the Delaware and Federal level (as far as new tax IDs go), they completely forgot to do this in California where we operate. They're not large liabilities thankfully but it's been a persistent headache for going on two years.

This is just awful. There's owning up to mistakes, which is very "trendy" right now, and then there's being a straight up terrible, unethical, incompetent person. It's a bit gross to reference Ben Horowitz, to try to make this seem like a "classic" startup moment that every startup goes through. E.g., "most companies go through at least two, and sometimes over a dozen WFIOs in their lifetime."

1. "And so I learned that we hadn’t been paying payroll taxes for almost 3 years – a particularly painful thing given I believe in taxes as a means of giving back to society." It's weird and manipulative to throw in how much you believe in giving back to society here. You majorly screwed up oversight of how investment money was being spent to not notice the difference in financials given no taxes were being paid!

"This hurt even more because I’d been paying myself one of the lowest salaries on the team to maximize our runway and support our mission." Again, you're the founder. If you're going to make that statement, at least include that you have a much larger equity stake in the company - you're not sacrificing yourself completely!

2. "Mistake 3: Not being explicit about hacks" should be re-written, "Being Dishonest." Cloaking the language as "hacks" and again referencing PG to make your behavior acceptable - (he says it's ok, it's just really a grey area!)

3. "Mistake 7: Telling a half-truth" should be called "lying." If you still think it's a half-truth, you have NOT learned your lesson. It's not "rule bending." Everyone knows that when you say you dropped out of Harvard, the assumption is that you were some form of degree earning student. Seriously, it wasn't a half-truth if the people you're talking to were assuming something else - it was a lie.

Lastly, NOWHERE do I see remorse for the lives of your employees who you laid off. These people trusted and believed in you, and you let them down. Did these people find new jobs? Did you help them find new jobs? How did you structure their layoff packages? Are any still struggling? Were you able to support their next career moves in some way if not monetarily? Not really mentioned, which suggests you don't really care. You're much more focused on you.

I see that you made this HN account only to comment on this post. I've learned that getting into a back-and-forth with anonymous posters on HN is never a good idea, but I'll respond just this once.

1. You're absolutely right. I majorly screwed up here. I say so as much in the post.

2. I think people can reasonably disagree here. An example: a potential customer asks a sales guy during a demo "...and will we be able to export a list of our users?" Answer: "yes, absolutely". The customer signs. The sales person then runs to dev team and says "we need to build this export functionality before they launch". Did the potential customer think that feature already existed? Probably. Is anyone being hurt? I don't think so, so long as the export functionality can actually be built before the customer launches.

3. I was a degree earning student, as I mention in the post, but that doesn't matter. The way I talked about it was wrong, whether you call it a "half-truth" or a "lie".

Regarding the employees who are no longer with Amicus, anyone that wanted help finding their next job got it. Everyone that wanted their resumes sent over the YC list got that. And I spent a good part of the two weeks after this happened making intros trying to help people land somewhere they could be happy. The team breaking up was one of the toughest parts of this whole ordeal. Having to part ways with an employee when they're underperforming is hard, but having to part ways when they're doing their job well -- because of mistakes you've made -- is almost unbearable.

2. The reason engineers tend to hate tactics like this is that it shifts responsibility for fuck-ups from you, the CEO, who should be managing and prioritizing features so you get the best bang for the buck, to them, the engineers, who are now on the hook for a feature that may or may not be able to be built in the time frame you promised. Things go wrong in engineering, and there are unexpected snags and slowdowns, and a well-managed business should be able to absorb them without losing customers. There are very real costs in added stress and loss of personal time for engineers - not to mention decreased trust from customers - that come from this tactic.

As the sibling comment mentioned, just say "The feature is not ready yet but we'll take your request under advisement and let you know as soon as it is." Then prioritize the features that lots of customers want. Maybe you'll lose the sale, or maybe they'll buy anyway because it was non-critical for them. Either way, you should be operating with enough of a financial cushion that one sale won't put you out of business (as PG says, "Deals fall through!"), and being able to aggregate requests lets you build a much better product instead of continually chasing after whatever the latest customer wanted.

Very well said. We actually saw a lot of the exact problems you outline. Largely because of this, as we matured as a company we moved towards the approach you suggest.

You could always ask the engineering team if it was feasible (assuming you can do that without guilt tripping them).

I see your point, it can put added pressure on developers, but don't you think (in a healthy company) that "shifts responsibility for fuck-ups" is a bit overstated?

Certainly transparency in sales is preferable, but is promising a (unexpectedly important to that customer) feature to close a major deal a "fuck-up"? There are some potential issues to steer clear of - team burn-out, feature bloat, etc. - but I would just consider it a sales expense/opportunity. If executed/communicated appropriately it could potentially create more trust rather than less.

Yes. Absolutely. I work for a company where deadlines are continually mismanaged for features because it really isn't predictable when a feature gets done or not. And the problem is at the top - but the top doesn't ever blame themselves. And so the blame shifts backward onto the engineers who didn't make the unreasonable deadline. The worst part is that the founders are non-technical so they really have no business making estimates about dea. We try to give the best estimate we can but it really is just an estimate, and it should be multipled by two and then have 10 days added to it just as a baseline. But the incentive is to overpromise, and so we're run into time compression again and again.

To me this just sounds like poor company/project management and passing the buck. I guess I'm envisioning a more healthy/well-managed environment, but maybe those are in the minority.

Almost all of the time the project we are doing for the client is so valuable that they eventually become quite pleased when we deliver what they wanted. But the mere imposition of a hard deadline on a feature that the deal-maker imagined because the client requested it is something we should change. I just think better/more flexible deadlines would be a good idea, in general, and overpromising to a client prevents that.

My experience in my office has been good otherwise, so perhaps I was being too negative above.

It is not overstated. What happens there is that development will end up in loose loose situation: fail the deadline or take significant shortcuts (ship buggy software). No matter what choice they take, most often second one, the development will be blamed.

2.) Caused a lot of big troubles in companies I worked for. The customer signs. Turns out that developers can not make the feature till the launch. Shortcuts are taken to cover up. We ship broken buggy software just to make the deadline. Whops.

Of course, salesman learned that all went well, because all those bugs are going to be reported/fixed weeks and months after launch. He does not see the connection. Salesman do that again and again, promises conflict with each other, development is permanently without feature plan to stick to more then a month. Work get to be done redone again and again and the code is increasingly crappy and buggy.

Of course, development gets blamed for all those problems. Of course development can do nothing about underlying cause of it.

Feature scheduling by salesman during the meeting is horrible thing. That behavior is the reason why sales have reputation of being liers and why companies tend to produce crap so often.

> 2. I think people can reasonably disagree here. An example: a potential customer asks a sales guy during a demo "...and will we be able to export a list of our users?" Answer: "yes, absolutely". The customer signs. The sales person then runs to dev team and says "we need to build this export functionality before they launch". Did the potential customer think that feature already existed? Probably. Is anyone being hurt? I don't think so, so long as the export functionality can actually be built before the customer launches.

I'm not OP, but you still don't get what's wrong here. You're still lying. Why not say "Not yet, but we have a great dev team and we would gladly add this feature in for you before launch." It's honest, and frankly sounds more impressive to the client.

It's so common that most people think this is how every one works.

I worked with many sales people who got CEOs later, because they made big sales, but most of them, because they sold stuff they didn't had, because they didn't really know the customers.

In extreme cases, this leads to overworked devs and rich sales people, when the devs are good and the features aren't that hard to implement. If the features are too hard, it leads to angry customers and the company losing much money.

" It's honest, and frankly sounds more impressive to the client."

LOL, how much have you sold in your career? Because really, it seems like you've never had a sales meeting at all.

Look, ethically, I totally agree with you.

Practically though, if you've worked in sales, you'll know that what the OP is talking about isn't just something that happens often, but is basically the life-blood of some rather large companies.

Now, I dislike it because it puts the impetus on the developers to deal with it if it goes wrong, and that sort of crunch-time stress is just crazy, but it's also not something that the OP has come up with on his own...

Smarter clients (and I agree that there are plenty of not-so-smart clients), will actually double-check on these things before buying in various ways. They can, for example, request an evaluation version to use, check with the support department exactly what's actually supported, or simply have them demonstrate exactly how the product can meet that requirement.

I'm sure there are more ways of doing that too, though, so these are just my observations. And yeah, don't trust the sales guys :)

Agreed. It is great that he is being open and honest about his morals.

But if I ever learned that a business partner were so dishonest with me, I'd drop them in a heartbeat. Business relations are all about trust and integrity.

He's not being open and honest about anything here. He's a liar. He lied to his partners, he lied to his investors, he lied to his employees, he lied to his customers, he lied to the IRS, and he lied to the press. Every single item on his list here is the result of him stretching the truth and calling it "hacks".

That's fun new word for "lies".

I mean, he's speaking openly about his morals here. Which is undoubtedly a good thing.

Obviously, he's a liar to his business partners, his customers, and his employees. But right now, he isn't a liar to us quite yet.

And it should be noted, that based on the replies here and the feedback, it sounds like he might not be a liar anymore. Hopefully he's seeing the issues that his employees have to put up with when he puts them into this kind of situation.

So he has gained some personal growth from this event. All's well in the long run, but its difficult to make up for broken trust.

Your #2 astounds me. To me, that is obviously, obviously, clearcut, wrong. And the way you justify it is transparently stupid. You say that it's fine because nobody gets hurt as long as the lie can be made good. The whole problem with lying (putting aside for a moment abstract moral ideas that it's wrong in some pure sense) is that it eventually comes crashing down.

Sure, it all works out fine. Sales over-promises, engineering delivers anyway, the customer is happy. Until sales promises something that not only doesn't exist, but can't be done. Then you have a binding agreement to deliver something impossible. You get hurt because you're now revealed as untrustworthy. The customer gets hurt because their plans are built on something that isn't going to happen.

I'm especially impressed that you're unable to see the parallels with your own story. Much of your post boils down to, "don't lie (especially to yourself), because it eventually catches up to you". Yet here you are, saying that it's perfectly fine to lie as long as it doesn't catch up to you. Did you learn nothing of the commonalities that tie your individual points together?

For the record, I haven't the slightest idea who you are or what your company does or did, and am basing this comment purely on your post and this comment, just in case it sounds like I'm reacting to old wounds or anything like that.

Thanks for responding. I actually made the account because I haven't commented on hacker news before though I read it all the time. I just feel strongly about it so I had to write a response.

I stand by my comment.

> absolutely

When a vendor uses superlatives like "absolutely" in answer to a capability question, they are lying. This also applies to politicians.

If the answer is "yes", they will say "yes" or "yes, because/for example ...".

Seth, I'm very impressed with your level-headed response here. As others have said, thank you for writing the post that you did. I've been in similar situations so I know that wasn't easy. People will be upset with you and that is their prerogative--after all, you did make some big mistakes and you know it--but the best thing you can do is make your apology, learn from it, and move on. Good luck!

First, I think xcubed is right about #1. Not paying taxes should be considered a criminal negligence. All companies should operate within specified rules by the law and if one company does not it gets an unfair advantage over others. As a stakeholder in a company one should learn how to run the daily operations or hire some bookkeeper that can.

The other points (2-3) I don't see any problem as that's how all the companies that I know operate. Everybody sells half-ready products. I would even consider stupid not to do that.

Regarding the employees I think that every employee that joins a company is part of the and the team fails as a one. I have been a part of a failing team and I don't hold the company's owners resposible of my future career. I don't think Enron's owners were very much interested in the re-employment of their staff either.

I was once listening to a lecture by Monty Widenius and he said that statistically an enterpreneur succeeds in the third startup he/she gets going. Failures just teach us how to do things better. A culture where a failure is considered as our only lost chance of success does not lead to anybody succeeding.

This kind of comment is remarkably shitty. Someone performs the extremely unpleasant and stressful task of publicly admitting to his mistakes so the rest of us can learn from them, and xcubed responds by spitting in his face. What's the result going to be if we tolerate this sort of behavior? Well we don't have to guess, it was documented in the original post: most founders are not willing to admit their mistakes in public.

In game theory terminology, xcubed's comment is called responding to cooperation with defection. In plain English, it's called being an asshole.

Whether you agree with it or not, Xcube makes thoughtful reasoned points; you are just name calling and trying to silence critics.

There are tons of supportive comments on this thread. Tons. Presumably these are all people who have exactly zero first-hand knowledge of the situation. They are taking Seth at his word that this is an honest description of what actually went down. I hardly think it's obvious that he did this all for the sake of educating the rest of us. He could just as easily be trying to control the narrative as his startup implodes - a very common trait of founders in his position.

This guy clearly made more than just a few "mistakes" - some of the things he outlines here persisted for months if not years... and most of this is just an artful description of what "in plain English" amounts to lying to the public, his team, his co-founders, and his investors for a very long time.

So personally, I have to ask: what makes YOU (and others on this thread) believe what he's saying here? How do we know there's not more to the story?

I agree with others that here that we should all hold our judgement, and our praise, unless we hear more than just one side of the story.

The reason I believe what Seth is saying here is that if he chose to lie to make himself look better, he could trivially have done far better than this.

If he were putting someone else down, I would agree with withholding judgment - in either direction - until we heard both sides of the story. But he did no such thing. Nothing in the article contains any hint of blame for anyone except himself.

The way it's written, I agree with you completely. It's an example of the sort of wantonly confrontational language that seems to flow naturally from many people when alone behind a keyboard.

But the substance of it – suggesting that some apologies are perhaps somewhat orthogonal to the wrongs admitted, or that there may be a lack of thoughts expressed for those let down by the mistakes – isn't unworthy of consideration.

It's just a shame these had to be written from a perspective of confrontation rather than of compassion.

When someone does a bunch of shitty things that directly affects the lives of others, anger is a wholly reasonable response. While it's nice that the OP is being open about mistakes, you don't deserve a pat on the back for telling the truth, it's the default behavior we expect of people.

Do we? Human beings tell half-truths and lies pretty frequently. I bet if you examine the history of your own utterances for the past several years. you'd find that you do, too.

There are obviously different scales of truth-telling and deception. "It's your baby." is a lot different than, "Ah - I can't make it. I'm just too tired!" But it's still lying. In fact human lying is so frequent that a lot of the smaller lies we tell to be polite or avoid hurting feelings barely even register as lies, even though that's what they are, plain and simple. Clearly Kant's maxim that lying is permissible under no circumstances is false.

In business lying is rampant. You are competing with liars. Marketing is institutionalized lying. People are constantly embellishing the features of their product so that it purports to do something magical when on closer inspection most features are much more mundane. Sales is even more about convincing the person you're talking to that they can't live without something they probably can live without. In other words, being a good liar is pretty much a qualification for the position.

Does that make it ok? No. But does it mean our expectations are lowered? Yes. So when someone goes out of their way to come clean and tell the truth at great disadvantage to themselves, especially in business, we should recognize that for the exceptional event that it is. I don't think that makes lying more acceptable - but it incentivizes truth-telling.

I don't agree that lying in business is a requirement to run a business and do so well, although you are right in that lying is common in a variety of ways. But I don't have any intention of lowering my expectations nor should anyone have to. Why should workers just have to live with shitty working situations and bouts of unemployment created by liars that lead businesses into bad situations?

I don't think it's a requirement in business but that doesn't change the fact that businesspeople, and sales people and executives especially, lie and lie often.

They shouldn't. It would be better if nobody lied in a way that harmed people. But in a world where you have every reason to never disclose that you harmed people by lying, we should be encouraging people to eventually come clean. After all, the moral hazard here is that if you punish people for eventually coming clean you will never know what happened, which is worse than the already bad situation of only knowing after the fact.

That's why these failure stories are good, even if they admit wrongdoing. And that's why we should be receptive to them, even if it's something we don't want to hear.

I can't really agree with you - I have made many of these mistakes (taxes! Paperwork! Forms!) and it's not out of innate evil intentions.

This sort of article is important - if only to remind the next generation not to be so damn stupid.

And I can't blame him for his lack of remorse - He seems to have built a valid company employing real people - society has a net win. Did it cause pain on the way - yes. But the people he laid off had a job for the time they had a job. That's about how I measure work these days - it's no less stressful but at least it's fewer nasty surprises.

>I have made many of these mistakes (taxes! Paperwork! Forms!) and it's not out of innate evil intentions.

The only point that is about "taxes! Paperwork! Forms!" is the first one, and even the OP wasn't attributing that to any "innate evil intentions" like you've stated, just incompetence. There is a difference in degree of messing up tax forms for a few years and not noticing that you are not paying any payroll taxes for over 3.

unfortunately I don't think many people would understand what Seth and his team has gone through, and I don't think you could unless you got to a similar stage with a company of your own. what is really awful is that most people only want to hear about mistakes from people who are already wildly successful which is severely limiting your supply of knowledge.

I know this is a minor point of the article, but as someone with a degree from Harvard Extension I need to weigh in on that part of the story. I hate people who make this lie of ommission. Harvard Extension isn't Harvard College or Harvard Business School, but it still provides a very good education with great flexibility at an even better price. However, there is a small minority of people that continuely try to pass off their degree (or in this case a lack of degree, which is an even bigger crime considering that both the admission and graduate rates of the College and Extension School are roughly inverses of each other) as something more than it is. This isn't a fabricated credential on a resume; it is a lie that makes other people guilty by association. Everytime someone confesses or is caught doing this my degree becomes devalued. It establishes a repuation for HES students and alumni as unethical Harvard wannabees that are looking for any way to cut corners. The lesson to learn is not about managing your own reputation for ethics and honesty, but to also remember that you are a member of community. You don't only represent yourself. You represent yourself, your company, your friends, your family, your school, your industry, your hometown, your gender, your race, your sexual preference...

Obligatory [semi-]relevant xkcd: http://xkcd.com/385/

I also took a few Harvard Extension School classes (mostly Greek and Latin, but also Distributed Computing). I didn't earn a degree, just took a few things that interested me. It's on my resume as Harvard Extension School, and I have to actively correct people who think it's more than it is. My jokey way of putting it is that HES "takes anyone with a credit card." What's really embarrassing is when someone introduces me as someone who "went to Harvard." They were great classes, especially the ancient Greek, and I'm very grateful for the opportunity to learn what I did, but it's not like I did my undergrad there. I fact I applied and didn't get in. :-)

There are two separate problems with HES identity and association.

The first is that HES's own guidelines instruct students to list their degrees in ways that can be confusing. See: http://blogs.law.harvard.edu/lamont/2013/09/18/harvard-exten...

The second problem, and I think the reason behind the first problem, is that the formal way to list a degree on a resume is not by the school one attended but by the university that grants the degree. That is, an HBS graduate would list their degree as an MBA from Harvard University; an HLS graduate would list their degree as a JD from Harvard University. Harvard's method of identifying the school is that it awards unique degrees according to which school was intended. Thus an MBA will always come from HBS. A JD will always come from HLS. There is no BA or MA from Harvard Extension School, but rather a BLA or MLA. In this way, the correct listing of a BLA from Harvard Extension School is distinguishable from a BA from Harvard College, but of course, only for a person who knows the difference (or doesn't assume the "L" is a typo). This is, in my view, more a problem of poor convention than of anything else.

Yes, there are also people who plainly abuse language to mislead people. They make people like myself ('07 ALMM program) very self-conscious when it comes to talking about my education there. I never brag about the Harvard name. If pressed I refer to my program as "Harvard's night school for working adults" (because let me assure you - nobody knows what the hell "Extension School" mean anyway). It's a shame that there's no clear, accurate way for HES students to talk about their programs without denigrating their own accomplishments or risking being impostors.

Finally, there is one bit of praise I would like to bestow upon HES that cannot be said for any of Harvard's other schools: HES is the most meritocratic academic system I have ever seen. Your success boils down to whether you can do the work and whether you put in the time. It doesn't matter what your grades were in high school. It doesn't matter how much money your family has donated. It doesn't matter if you can throw a football. The requirements for admittance are as black and white as they come. If you show up, do the work, and get good grades, you'll get admitted. If you take three classes and can't consistently get Bs or better, you will be rejected no matter how much money or legacy you waive in front of the school. I hope someday the rest of academia will consider this model.

I would echo your point about actively correcting people. It is something I find myself doing all the time. The problem is that it often isn't worth going in-depth describing the school, most people simply don't care that much. My jokey explanation is that it is "Harvard's version of community college". Funny thing is some people will come away even more impressed after a comment like this thinking you are incredibly humble. The Harvard brand has a lot of power.

> My jokey way of putting it is that HES "takes anyone with a credit card."

That's nice & humble of you, but it's not precisely true. There are very few requirements for taking a random course or two (or 20) at HES, but to be admitted to a degree program at HES is not so easy. You have to take a certain number of HES courses and earn a high GPA in them to be admitted to a degree program. Then, of course, you have to pass the full slate of courses to earn your Bachelor's degree.

Some people also seem to be under the impression that HES courses aren't as difficult as regular Harvard College courses. If anything, I'd say there's far more grade inflation in Harvard College than in HES, i.e., it's probably easier to make an A in a lot of (though obviously not all) regular Harvard courses than it is in Extension courses.

This is part of what I referred to in my first post and is usually what I mention when someone is truly interested in the school. Harvard College does its credentialing when you apply. A very low percentage of people who apply to the College get in, but almost everyone who does will walk away with a degree. The Extension School moves that credentialing until after the student enrolls in classes. There are virtually no barriers to take classes and the application process isn't hard to get through, but the amount of students who leave the school with a degree is very low. Therefore the school is more of a meritocracy. Almost anyone who is capable and determined enough to earn a degree is able to regardless of their prior educational history. The last time I saw stats on it, the actual percentage of people who apply to Harvard College that earn a degree was very close to the number of people who take a class at Harvard Extension school that earn a degree.

Sure, but a lot of the people taking classes at the Extension School don't want a degree. For example, I had students whose employers were paying for them to take a single course to give them some background knowledge or insight into their jobs. They're not looking to graduate; just to take a class or two that will help them with their careers.

That is a good point and the numbers aren't measuring the exact same thing (on the flip side of your example is the number of applicants to Harvard College who might not attend even if accepted). I didn't intend to reference them as some justification that the two schools are in any way equal. The only reason to really compare the two rates is because they have similar values and highlight the differences between the two schools. The toughest part of the College is getting in, the toughest part of the Extension School is getting out.

As a grad student at Harvard I was involved in teaching several courses at Harvard Extension School. While the students were generally motivated and enthusiastic about the course material, it was a very different academic environment, one that was not as intellectually rigorous.

You are right about grade inflation, but the difference in the level of rigor between the two schools means that not all As are equal.

    > > My jokey way of putting it is that HES "takes anyone with a credit card."
    > That's nice & humble of you, but it's not precisely true.
Thanks for pointing that out. I meant no disrespect to the folks who sign up to HES for the long haul.

Someone mentioned that HES courses are less rigorous, and I believe that's true. (Although Greek and Latin were still pretty tough!) On the other hand, the students I met were all extremely motivated and hard-working. It changes things a lot when everyone in class is attending voluntarily on their limited free time and out of their own pocket. I'm sure we weren't as smart or intellectually curious as an undergrad Harvard class, but I had way more respect for my peers there than I did in my own undergrad setting.

As long as you put "Extension School", It seems strange that someone would think you went to undergrad there.

Then again, I ride the Ⓣ every day. Maybe people just have no clue what "Harvard Extension School" is.

People have no idea; once they see the "Harvard", they can hardly see anything else.

The confusion extends even to Harvard grads. Because of the mix at alumni events of Harvard College graduates, MBAs, JDs, MDs, Extension School grads, etc., sometimes the organizers print up name tags with the degree abbreviations on them. It does little good, though: I've had Harvard MBAs ask me what my "A.B." means. (It's an abbreviation for the Latin artium baccalaureus, pretentious Harvard-speak for "bachelor's degree". I.e., it means I "went to Harvard" in the colloquial sense of the phrase.) As far as most of them know, A.B. and A.L.B./A.A. (the Extension School degrees) might as well be the same thing.

I hadn't encountered this, being across the Atlantic, but the behaviour is not uncommon. I once knew a man who in his younger days was really interested in puppetry, an got into a art-college-type puppet-making and puppetry course in the English town of Oxford. He lost interest after a year and dropped out, and of course tried to chance his arm with 'studied for a year at Oxford' on his CV for a while after.

The funny thing is that this lie would only work outside of Boston - in Boston proper, companies big and small see this all the time, and are very alert for it (in part because of the presence of successful Extension alumni at the firms).

It's absolutely astonishing to me that SV investors and incubators pass along ~4 million USD to a team of people with so little business experience, as to neglect hiring an accountant. End result being unpaid payroll tax for almost 3 full years!

No one ever asked what accounting firm Amicus used? No one ever just glanced at the finances and thought hey, where's the frigging payroll tax? Is valley capital so readily available as to warrant this kind of extremely low investor engagement in funded companies?

No written founders agreement either. I mean this is basics, and it should have been caught or taught by the accelerators and the investors.

This is not a shot at the OP, who I think is exceedingly brave to write such a public, honest and informative account of their screw-ups. Competence comes from experience and everybody in business has been incompetent at some point.

Rather, this is a massive failure on the investors' and accelerators part. With all the talk of "funding the team, not the idea", you'd think there was a bit deeper understanding of team experience and competence, than just some degrees from an ivy.

It's mind blowing that investors can be so careless with their cash. I wonder if it's a common occurrence or if this is an outlier situation.

> It's mind blowing that investors can be so careless with their cash. I wonder if it's a common occurrence or if this is an outlier situation.

There is way too much capital chasing too few opportunities today. The bar for who and what gets funded at seed stage is extremely low. Social proof and accelerator cred clearly often substitute for due diligence.

Exacerbating this is the prevalence of party rounds in which lots of investors put in relatively small chunks of capital. For obvious reasons, if you're raising a $6 million Series A from two or three name firms on Sand Hill Road, you're probably going to be subjected to a lot more scrutiny than if you're raising a $3 million round from a group that consists of upwards of 10 angels and/or super angel funds. In the latter scenario, the amount invested per investor tends to be so small that none of the participants have a real incentive to perform rigorous due diligence, which costs money and takes time.

According to CB, 15 investors participated in Amicus' $3.2 million round in 2012.

Additionally, accountants can save you huge amounts of money in the long run.

We pay our accountant a very modest £100 a month, and he's easily saved us many multiples of that again and again. If you're ever thinking that you can't afford an accountant you may want to think again.

It's not astonishing to me at all. Look at Amicus now. 1) They're still around, and 2) it seems they have actual paying customers now (in a scaleable market). That is farther than 95% of startups.

Amazing article.

As advertised, it's not a self-aggrandizing "mistakes" post that points you at the end to the author's next venture. It's full of the kinds of things that keep me up at night.

It reminds me of something similar that happened to me: I was running Adwords for the first time. The dashboard wasn't showing that any of my ads had run, and it kept telling me to up my bid amount. I kept upping it and upping it, and I wasn't seeing any ads running. I said screw it and forgot about it.

When I happened to look at the dashboard 3 weeks later, I had blown $6k on Google ads. I had to get my team together and tell them what happened and apologize. ($6k was a lot of money to us.) Like Seth, this hurt a lot because I paid myself less than anyone in the company to save money.

Seth, if you're around the iDoneThis office at Great Jones and Bowery, hit me up. I'd love to buy you a drink.

Thanks for the kind comment, Walter. I'm based in NYC but I'll drop you a line next time I'm back in SF.

Great Jones and Bowery is in NYC ;)

> In the early days I would often let potential customers think we already had a feature they wanted

What. How is this even remotely acceptable? If discovered it destroys your credibility. Among your employees it destroys your credibility. If I was an employee and found out that this was happening, I'd be extremely upset. I wouldn't trust a thing you say. If you'll lie to customers, you'll lie to me.

What. How is this even remotely acceptable? If discovered it destroys your credibility. Among your employees it destroys your credibility. If I was an employee and found out that this was happening, I'd be extremely upset. I wouldn't trust a thing you say. If you'll lie to customers, you'll lie to me.

Your optimism is endearing, but the vast majority of companies I've done business with do this. Often companies I've worked for have, too – sales people are very happy to overstate the available features and capabilities of any product. From their perspective, a shoddy, rushed implementation to an unhappy client is still better than having them walk away from the purchase entirely.

This cannot be overstated. If you give the sales team any room or freedom, they will make your life hell trying to keep up with "features" that outdo everyone else just so they can get their commission check. They don't have to deal with anything beyond signing of the purchase, so they don't care that it sinks everyone else to get that purchase.

Salespeople who sell products by providing false information are committing fraud on behalf of the company and should be fired.

That would result in mass unemployment in some sectors of industry.

The problem is that as long as your competitor says 'yes' and you say 'no' the competitor will get the customer.

Customers should be firing companies that provide false information during the lead-up to a sale. Then the sales people can stay employed and everybody comes out ahead.

> That would result in mass unemployment in some sectors of industry.

Are you making an implicit suggestion that we should tolerate fraud because it employs people?

It shows that it's not easy, no matter what 'should' may be.

You should expand on this.

No, he made his actual suggestion quite explicit.

This is just how things work in a lot of industries.

You promise the world to make a sale, then once you've signed, work frantically to make the vision you sold a reality. If you were open and honest, you wouldn't sell a thing.

The only people who lose out are those who take salespeople on their word and don't get everything agreed in writing. Never take a salesperson on their word.

> If you were open and honest, you wouldn't sell a thing.

Or you could, you know, make stuff worth buying.

Companies who did this would be systemically outcompeted by companies who choose to look the other way when their salespeople overpromise. And you will find that in general, they are not saying "we have feature X as an available feature as of today" -- they say things like "feature X is under development" and work to upsell it/et cetera. It can be an extremely effective tactic for a lean company to explore the market without overinvesting in development, and it can be destructive behavior by salespeople to advance themselves at the cost of the company.

Like so many things, it's a balance, not an opposition.

I agree. But just because something should happen, doesn't mean that it will.

I don't work with a startup, or even in the tech industry, but this is an issue that takes up ~25% of my time. I have to keep pushing back on sales to make sure that they're not selling something that's physically impossible, or just plain stupid (but sounds good).

This is something that cuts across business in America in general, I think.

You're absolutely right in this specific case.

The sales people will go crazy, so don't let them sell anything.

Have the technical people evaluate that.

Let them sell what you already have. Why do they need to invent fake products to close a sale?

From my experience, big enterprise product company representatives like to do this:

Question: Does your application has x, y and z feature and can be integrated in our process easily?

Answer: Sure, all there. Just have to tweak a few settings in the GUI.

Truth: We have a bare-bone product and a semi-documented API. Feel free to implement all the features you want and adapt it to your process. We can provide you professional services (for a price, of course).

Other people lie, so lying is okay?

You (not you the person I'm replying to, 'you' the company/sales person) that are taking money from somebody based on an untruth. It's outrageous, regardless of how often it happens. I have the right to know what I'm getting for my money. Don't lie to me, ever.

Since you are competing against people who will tell you that the feature they want already exists, people who are too honest in this area will quickly get filtered out of the marketplace.

It sucks, but there are lots of markets where the customer says "please lie to me" and gives their business to the person with the most reassuring lie.

This philosophy seems to imply that trust and relationships are worthless in business. If you perpetually promise features that don't exist, you'll eventually promise something that either can't be implemented at all or has to be implemented sloppily to deliver.

How can you possibly sustain a long-term business when you're so willing to damage business relationships?

Many startups don't become long-term businesses.

However, the startup that (wins a big contract with a big promise && delivers on its promise) certainly has a larger chance to become a long-term business than the ones that short circuit themselves out by not winning contracts.

I don't think that's true. In my experience, the very best companies all refuse to do this. If you leak an upcoming Google feature or promise something to a customer that doesn't exist, you get fired. Same at Facebook and Apple, or Blizzard.

I do think it's much more common in highly competitive markets with no barriers to entry. Google/Facebook/Apple have pretty strong moats and large diverse markets, and can afford to release products "when they're done" and not talk about them until then. People in very competitive, low-margin markets often need the sale now. But then, people in the latter type of markets quickly get filtered out of the marketplace regardless of what they do.

Google and Blizzard are selling mass-market products. When selling enterprise software, you can find yourself facing checklists of "product must do X." (Even if the customer will never ever ever use X.)

On the flip side I'm sure you've heard the phrase "nothing gets done until someone sells something."

There's a lot of cases where you are certain you can build what the customer needs, but you can't spend resources on it until you have a sale in hand.

Unfortunately, this is true.

It also puts employees under constant pressure, since every feature is already "late" as soon as implementation begins, and extraordinary effort is required on an ongoing basis just to keep the company from embarrassing itself.

At the company I work for, executives and sales people frequently make "commitments" to our customers for features that don't yet exist. People who make commitments on my behalf without even mentioning them to me beforehand (let alone asking me if what they're promising is even possible to deliver) don't get my full respect.

I worked for a founder who did this all the time and it's incredibly stressful as an employee. It would be fine in the limited case where the features are fast and easy to implement: say two days' work at most. I enjoy my paychecks clearing every other week, and losing a sale over small amounts of effort is dumb, particularly since sales where relatively large (low hundreds of thousands of dollars). But this founder didn't know and frankly didn't care about that; he talked about features we'd just begun to do basic research on as if they existed.

I'm being intentionally somewhat vague here, so it's hard to really relate the details, but in one case he discussed a feature (having to do with distributed markov chains) that not only didn't exist but, afaik, nobody in the world even understands how to do and is the subject of active research. Needless to say, not something that could be implemented in a couple days. Worse, we where talking to some phds who fucking understood the above, and they immediately started asking me how the fuck we did it!

And yes, it often made us look like complete assholes in front of customers.

I worked for a guy that did this too. Instead of me losing sleep over it, I put my job on the line (because if this was standard operating procedure then I would rather be unemployed...) and told him he needed to come clean with who he sold admitting he was at fault and not the developers/etc. If a sales person has to eat crow they quickly learn to avoid future crow eating. Things were much better after that.

having to do with distributed markov chains

I'm guessing you mean distributed Markov Chain Monte Carlo ?

Sounds like an interesting problem, I'd really like to hear more about that.

I'm really interested in "difficult" problems with significant commercial applications. (My contact info is in my profile if you don't want to post publicly).

Parallel MCMC implementations exist. My favorite is emcee - http://dan.iel.fm/emcee/current/ which has excellent support for parallelism.

Derail aside - I completely agree that lying about features is horrendous and I'd never ever work for a boss that did this on a regular basis.

This is incredibly common behaviour amongst sales people. Or what is also common is 'oh, funny you should mention that, we have a team working on that feature as we speak'.

90% of the time it is fine, contracts tend to be organised for several months in advance, long enough for you to get a feature in place.

As a developer, I've been on the receiving end of "we promised the client we could do this, and they've already paid us, so get to it" more times than I can count... it's my least favorite salesman trait, by far.

And the salesman gets a nice commision from the sale while the developer gets to work an extra 20 hours that week at no extra pay.

New rule: developers, let's demand 50% of the sales team's commission for contracts sold on promised features.

While I'm not defending the practice of vaporware, it's not the root of the problem here. The root of the problem is that if you have a policy of working unpaid overtime, unless you are lucky in finding only wise or scrupulous employers, your life is going to be trashed.

To you, it is completely irrelevant whether the reason your employer ordered you to trash your life was because the salesman sold vaporware, or because of the phase of the moon; the outcome for you is the same regardless of the reason the order was given. You have to change your policy of obeying such orders.

Same here; the worst is when they want a feature that's technically impossible.

its even worse when you're in the meeting with the client when the sales people say you've already got this feature and you're thinking "no, no we don't dear go this is going to take a massive database change and....."

We do this all the time for features on our roadmap, if a high level client wants to "sign up" and basically pay for the new feature we move it up in the roadmap.

That's not even remotely my least favorite, as at least salespeople who overpromise too much tend to get caught out.

My least favorite is salespeople who give product away for free (including the support thereof), hurting the bottom line, since their commission is on gross.

You are referring to a phenomenon known as vaporware [0]. Microsoft was notorious for using this strategy of pre-announcing features in order to kill smaller competitors from developing them, afraid that they won't be able to compete with the 800-pound gorilla [1]. Lots of other companies starting copying this tactic, so much so that tech industry publications like Wired started bringing out annual lists of vaporware [2]. Eventually the Justice Department filed lawsuit against Microsoft [3]. Amicus is just following a long, time-honored tradition.

[0] https://en.wikipedia.org/wiki/Vaporware

[1] http://www.nytimes.com/1995/04/24/business/information-techn...

[2] http://archive.wired.com/culture/lifestyle/news/2005/01/6619...

[3] http://www.justice.gov/atr/public/press_releases/1998/1764.h...

It's called vaperware and it's part of a lean strategy (that way you only build what people actually want). It's extremely common, in fact I believe New Relic was founded using this type of strategy. Take this with a grain of salt because this is an old passing memory of mine, but I believe Lew Cirne called up business owners and sold a bunch of them on the original new relic product before even developing it.

I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying), if it is some sort of technology that you aren't sure is possible or not that is certainly different.

"...I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying)"

So the salesperson/founder needs to have a good enough model of how the software works so that they know if a feature is relatively easy to provide, or if as another poster commented, it would require say a major change in a database design. I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying)

When I was being sold to, I developed a good ear for phrases like 'in development' or 'that is just a custom report'. We used put it all in writing &c.

as someone who headed the dev team in a startup where the ceo did this repeatedly, i have to say it's a huge mistake. it was very demoralising to the entire engineering side of the company; we felt that we were never given a chance to deliver a properly working product because we were always working round the clock and frantically adding half-baked features that had been used to close a sale.

Agreed. The fact that most business seem to lack basic ethics is not an excuse to do so as well.

It is also fraudulent and could lead to litigation against you. I have no sympathy for companies and people who do this.

Two things:

1. In my limited experience with pitching/salesing when you say "Yeah I think we can probably build that" the customer/client will take it as "We already have this". There is no amount of rational talking and explaining you can put in place to prevent this. If they ask for something, and your answer is anything but an unequivocal "No." they will think you already have it.

2. Isn't the whole concept of MVP and lean basically going out to people and saying "We have this" then seeing if somebody pays, and if they do, making it?

1: "Yeah, we can build that. It will cost $TIME and will add an extra $$$ MEGABUCKS to the total cost".

One basic technique is to keep track of the life time cost of sales, development, delivery and support/maintenance for all projects, and then measure the performance of salespeople based on both income and cost (as opposed to just income) makes them a lot more motivated to sell good solutions.

My understanding of MVP is that you essentially sell a lack of features. Make something that does as little as possible that someone will buy, not selling something and then figuring out how to do it.

Literally the first step described in Four Steps to the Epiphany is selling mockups. Mockups.

Well, that's depressing. Thanks for the clarification.

As somebody who has been on the developer side of that, I'd say that it depends on the feature, and on the available time. If you are sure that it's viable (as I'm assuming the author was), why not?

I'd still prefer to frame it as "that's on our roadmap, and will be done by the time we close the contract", but then, there's little practical difference.

First I'd like to thank sethbannon for writing this valuable article. As someone with two failed startups under his belt (including one through Y Combinator), I think entrepreneurs being more open about the challenges of startups is a good trend.

FedEx, Evernote, Intuit, Zappos, Airbnb – I’m endlessly inspired by those founders who faced near collapse but simply refused to give up.

These stories can be inspiring, but remember that they suffer from survivor bias. The companies that do go under don't get as much attention in the financial press.

Sometimes the reality is that it's time to shut down. Give up on one thing, move on to the next thing.

Given, that the dominant comments over here are in some shape or form pointing out deficiencies of some sort in Seth, I would like to point out something. You're forgetting how hard it is to start something new. I'm sure that some of us might have avoided some of the items on the list, some might have even managed to avoid all of them. However, I'm also pretty sure that all of us would have made a lot of other gigantic mistakes along the way.

I'm in the process of starting a non-profit in the field of medicine and I've been taking a lot of pain to do my homework. I've spent my evenings quizzing people, reading books, talking to the friends I'm working with, and just trying to get something out of the door, but I wasn't even remotely aware that things could go wrong in half the permutations Seth mentions. In fact, in his list alone, I spotted at least 3 things that I would have inevitably messed up if it hadn't been for an hour of inspired reading based upon his post. It's hard to make something new, sometimes it feels that you're trying to push through the improbable, shift the odds to your favour, and achieve what seems to be so impossible. In that world, in that arena, it's easy to mess up. It's easy to make mistakes and it's very hard to fix them.

At the end of the day, the truth is that everyone messes up. Everyone has that one time where they should have done X, but did Y / nothing and that then resulted in bad thing Z, which could have dragged / or did drag them under. This is why - in my mind - the right question to ask over here is, what does it take to handle a crisis with Seth's grace? After all, not dying is the difference between crossing the finish line and pausing along the way.

So, revealing one of these mistakes would come off as a brave revelation of a personal mistake; a lesson learned and moved on from

All of them together seem to come across as being simply dishonest. Being years behind on taxes because you never bothered to have a proper accountant look at your finances, calling people co-founders one day and then treating them like employees, selling non-existent features to your customers and collecting credit card information with no product to back it up, saying you "dropped out of Harvard" when you "took a few courses at Harvard Extension", not telling your investors about what's going on, all adds up to pretty much being entirely dishonest with everyone you interacted with.

One of these mistakes could be forgivable; I've known some very good people who were terrible at accounting and so wound up with lots of back taxes to pay. A good salesman may sell a feature that's not quite ready yet; it's sometimes frustrating for the developers, but as long as it's more the exception than the rule it's OK. Focusing on your product more than your investors may be OK if you just have so much to do and you really are bringing them a lot of value.

But all of them at once? That doesn't leave you with very many excuses; you weren't so busy building features that you didn't have time for investors, you were using your customers, and the IRS, and your "cofounders" as extra investors and even with all of that you weren't able to make it work out.

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.

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.

> it is plausible for someone who is administrativaphobic

Okay. But then you shouldn't really call oneself a CEO.

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.

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?"

Woah, slow down there bud. You're not allowed to have negative opinions on anything a entrepreneur does on Hacker News.

god bless you both!

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

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.

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.

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.

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 :) ]

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.

They do with taxes as well. But from the article, the IRS had an old name and address on file.

they notice that? ;-)

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.

>> 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.

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."

There are no excuses on payroll taxes. The tax authorities aren't fucking around about them.

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.

OK. But why are these founders so arrogant and pennypinching that they don't just contract or hire someone to do this for them?

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.

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.

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!

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.

> 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.

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.

Sure you should get an accountant. But you should still reserve that much money.

Getting an accountant is your first major purchase as a new business owner.

And getting a good one is not all that easy. I lucked out, the one I ended up with (after trying two others) was a CFO of a large company that decided he had enough of the pressure and joined his wife's fledgling accounting company.

So instead of just having an accountant I ended up with a mentor to boot, all for the price of one.

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