FWIW I didn't get that impression from the post. Here's what I assume he was referring to:
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.
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 really interested to hear about the other side of the story. Any links?
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?
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).
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.
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).
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.
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.
- 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...
(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.)
Also, you don't speak for everyone here, just for yourself.
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 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.
You guys are growing and its important to scale your communication as well.
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.
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.
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.
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.
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.
I didn't understand any of that when I was younger.
And I agree -- with me this knowledge has also had to come with age. Maybe others do better.
Nothing to be ashamed of though, plenty of people never learn that particular lesson.
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?
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.
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.
> “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.
The drivers who obey the law do not bear responsibility for the increase in risk, but neither they raised their own safety.
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?
That's a utilitarian approach which is completely orthogonal to what this thread is about.
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.
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)
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.)
" 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. "
Uhm, yeah, pardon my French, but that's complete bullshit.
People without honor, well...
It is a subtle, but important, distiction that is often used as a rationalization.
Edit: This really belongs on the child comment.
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.
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.
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)
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.
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 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 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 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?)
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.
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" 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.
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.
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.
I don't know. What salary would you take for your honest-to-god dream job?
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.
Is there some difference between the type of corporation which makes it acceptable, or could the IRS potentially go after all of those individuals?
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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,  and not assume that they will work when you need them.
 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.  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).
 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.
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.
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.
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.
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
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. 
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.
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.
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.
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.
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.
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.
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.
(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).
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.
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.)
Yes, dealing with the tax authorities directly is usually more complicated (might be simpler for a sole proprietor/small number of employees)
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.
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.
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.
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.
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.
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.
My experience in my office has been good otherwise, so perhaps I was being too negative above.
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.
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.
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.
LOL, how much have you sold in your career? Because really, it seems like you've never had a sales meeting at all.
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...
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 :)
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.
That's fun new word for "lies".
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.
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.
I stand by my comment.
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.
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 ...".
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.
In game theory terminology, xcubed's comment is called responding to cooperation with defection. In plain English, it's called being an asshole.
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.
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.
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.
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.
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.
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.
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.
Obligatory [semi-]relevant xkcd: http://xkcd.com/385/
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.
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.
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.
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.
Then again, I ride the Ⓣ every day. Maybe people just have no clue what "Harvard Extension School" is.
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.
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.
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.
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.
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.
On the way, my co-founder and our CTO stopped me and said “I’m resigning. And I’m going to tell the team why.” He then told me that he had lost trust in me as a CEO and as a person.
- Poorly defined co-founder relationships
- Not being explicit about hacks
- Telling a half-truth
You're free to disagree about whether these are the important reasons why Seth lost their trust, but to say that he didn't address the reasons why is just untrue.
True honesty is rarely rewarded in failure.
How about some empathy for each of those employees you are firing, who have to go home and face families and lives that they've shared with you and you have essentially shat upon?
They are not "resources". They are people, humans, and their lives and loves are just as important as yours. They shared a piece of their humanity with you to help you in your dream. A dream which, make no mistake, isn't making the world a better place. It's you yourself getting rich. You used these people and now they have to deal with their lessons learned.
Which aren't "lying is a bad thing" and "not paying taxes is bad" and "I need to network more with rich people." They are- "I need to find a new job and/or draw unemployment, I need to cope with this shock to my system, and I need to figure out how I'm going to pay the bills".
All the "libertarians" in this business lose sight of social agreements and safety nets, until they get screwed by someone who shares that approach.
... and got paid for it. Your company is not your family.
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.
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.
Are you making an implicit suggestion that we should tolerate fraud because it employs people?
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.
Or you could, you know, make stuff worth buying.
Like so many things, it's a balance, not an opposition.
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.
The sales people will go crazy, so don't let them sell anything.
Have the technical people evaluate that.
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).
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.
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.
How can you possibly sustain a long-term business when you're so willing to damage business relationships?
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 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.
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.
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'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'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).
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
Okay. But then you shouldn't really call oneself a CEO.
"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?"
Hey, it happens, oh ye wise and holy one!
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 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.
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.
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.
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.
At least, you should.
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 :) ]
And if you don't have visceral awareness of this fact -- you shouldn't be hiring people, and handing out salaries.
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.
Thank you so much for posting this. We all make mistakes, and for each of those, there could be ten thousand HN'ers who would come along behind us and say something like "But how could you do X? That's stupid!"
Everybody wants to read business porn. Nobody wants to sit down and hear the ways they will likely screw up. Guess which one is more effective. We need this.
This took guts to do. It is one of the more useful posts I've read, and it will have a positive impact. Congrats.
Yes, people can make mistakes. But for a pattern of mistakes, and for a person who seems to have such a casual relationship with the truth, you start to wonder if some of the mistakes were... not necessarily willful, but just plausibly-deniable enough.
Also, if you are conservative you'll have a spreadsheet that models your worst and best cashflow prognosis for the next 6 months to a year out. If you find yourself consistently outperforming the 'best' case in spite of an unchanged business outlook then it's high time to start checking things.
That gets expensive in a hurry (tax lawyer, fines, interest, surcharges).
Thanks for posting Seth. Must have been a tough one to write.
I can't say this enough, use Zenpayroll.
In a prior company I had one of the other payroll giants (Zenpayroll didn't exist 10 years ago). It was awful. We switched from one giant to another to make 401k easier. But in the switch, both companies reported earnings to the IRS. All my employees received notices from the IRS saying they each owed $10k+ in back taxes and penalties. No one ended up having to pay, but when the IRS comes calling, it's stressful even when you're not wrong.
Zenpayroll is fantastic. New game, new level.
Don't miss out on it.
But lessons learned and all that. I can't stress enough (at least from having run a small business) that accounting is the number one thing to get correct from the get-go. It saves such an immense amount of time, money and stress later on.
Usually they are resolved. By the time a small company has developed a big enough hole for the tax company to start tasking people with plugging the hole you're in very very hot water.
It's a resource allocation problem like any other.
As a post-mortem, I would understand, but surely not a good idea when your company is still trading.
Existing/prospective customers are going to read this, and it's not going to fill them with confidence.
So true. There is an immense amount of pressure within startups to 'bend the rules', and I think this hits the nail on the head.
That sucked but we don't blame anybody but ourselves. It goes to show that you do need to keep track of your own finances and not expect somebody to tell you when you are not paying things properly.
Knowing how much money you really have is the most important thing to know when you run a business.
At ConferenceBadge.com I spent a few days automating our accounting process with Xero API and brought some help from Xenaccounting.com (Montreal firm) to manage our books. It really helped us bootstrap the company and manage or tight budget month to month.
Accounting dept (not knowing where you are) is really dangerous and stressful.
I do respect that it's difficult to write about, though. In addition to just wanting to not feel like a failure, you don't generally want your employees and investors to feel like everything is about to go down the toilet. I'm glad to see more people writing about their real, honest experiences.
So much is made of out and out success these days, it sets up society to be an incredibly unforgiving place and feeds a loop of setting unattainably high standards for ones self or for those around you, and from that comes a fear of mistakes, if you cannot make a mistake you are denying yourself an opportunity to learn.
Context: I was a manager of a software dev team dealing with high scale, and am now a technical non-management leader. Prior to that the founder of a few companies. Throughout all of that I've tried to fail a little less each day.
It also makes you part of a relatively small crowd that tends to use that particular fact as a credential. At least they earned that, the OP did not.
However, it is but one of several schools that make up Harvard University, which include graduate schools like Graduate School of Arts and Sciences, and professional schools like Harvard Business School, Harvard Law School, and Harvard School of Medicine.
There is overlap between the different institutions at Harvard; the Faculty of Arts and Sciences teaches undergraduate classes at Harvard College, graduate classes at the Graduate School of Arts and Sciences, and performs research.
Harvard Extension School differs from many of the other schools in that it is not selective; anyone can simply pay to take a class. That means that merely attending Harvard Extension School confers considerably less prestige than attending Harvard College or one of the other schools at Harvard; all it means is that you paid for some courses.
Saying you "dropped out of Harvard" makes it sound like you were really brilliant and had a lot of promise but founding your own company held even more promise than finishing your degree. Saying that you dropped out of Harvard Extension just says that you took a few night classes and never really got around to finishing anything.
I took a few courses at Harvard Extension in high school. Some of them were really good, some of them not so much. A top notch school tends to offer a much more consistent program than Harvard Extension school. I've also attended another Ivy League school (group of very prestigious, fairly selective schools in the Northeastern US) as a full time student, as well as a flagship state school, and I can say that based on my personal experience, I'd rank Harvard Extension a little below the state school (which also had some really great classes and some mediocre classes), not up with the Ivy League school.
More info on all of the schools that make up Harvard University: http://www.harvard.edu/schools
Being in charge doesn't mean you get to win every argument, as you don't want your co-founders to quit, but it definitely shouldn't be a thing where all the co-founders have equal decision making capabilities because that may lead to never-ending strife. Most decisions shouldn't be arbitrary anyway, a decision should come with a convincing argument. It's those hard decisions when none of the answers seem perfect where you need someone to win out even though it may not feel right.
The leadership structure should be determined when the founding team forms, so there's no ambiguity later and each person needs to decide then and there if they can live with the setup and thereafter stick to it.
I am a startup founder and have been there done that - allow me to seed you with a radically different perspective.
You made NO mistakes. None. Every lesson that you learned - you will unlearn it in the next year or so. There are lessons to learn over here, but not the ones you mentioned - they will come - just wait for it.
Everyone pointing out in this thread about your mistakes is dead wrong. They don't know what it takes - most have never been close to what you are doing - they just don't know. This is also one of the reasons it might NOT help to talk about these things in public - though I am not saying that you shouldn't.
Most successful founders make most of these mistakes - and then some. The only mistake that you really made is to not figure out the business - everything else is not important. Sales fixes everything - and it would have fixed all these mistakes. Specifically:
1. Skipping on taxes till its too late - this is a trait of a successful founder. It means you are focussed on the business too much to bother about paying taxes.
2. Poorly defined co founder relationships - the story about 'every' startup. Let me tell you the secret about founder relationships - ignore them. Figure out the 'business' - founder relationships will figure themselves out.
3. Hacks - This world is unfortunately run by people who don't see things like we do. To hack is to have tread that middle ground which keeps the peace and also lets us run things they way they should.
4. Going it alone - There is no other way. At the centre of the biggest changes the world has ever seen, there is a lonely founder. You have to do it alone - dont seek to change it - just understand it.
5. Investor relations - Investors like a good business more than you and me - you fix the business and let the investor will fix the relations.
I really enjoyed reading your article. It was extremely insightful, and I hope to read more articles posted on your blog in the future.
The employer's half is what is commonly referred to as "payroll tax."