Mistakes You Should Never Make

http://sethbannon.com/mistakes-you-should-never-make

by sethbannon • 12 years ago

646 320 12 years ago

sethbannon.com

carlesfe• 12 years ago

Despite the amount of similarly titled articles that appear on HN weekly, this one is really, really good.

Don't miss out on it.

jlas• 12 years ago

Wait, so are you telling me that in 3 years no one noticed that taxes weren't being deducted from their pay?

IceyEC• 12 years ago

I suspect that it was deducted from their pay but didn't end up getting sent to the IRS.

hapless• 12 years ago

Employees probably paid their half automatically, but the other half is on the employers' books.

The employer's half is what is commonly referred to as "payroll tax."

sethbannon8• 12 years ago

The Bank of America payroll system we used was automatically withholding the payroll taxes from all of our paychecks every two weeks. It then just left that money in our company's bank account instead of sending it to the government because I never discovered the "submit tax" button.

paulhauggis• 12 years ago

even so, didn't you notice extra money in your business bank accounts?

govindkabra31• 12 years ago

wow.. so did you wonder, in each statement in those 3 years, what that money being put in your account is for?

plehoux• 12 years ago

Taxes! It is never too early to setup something like xero.com and bring outside expertise.

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.

methodover• 12 years ago

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.

octo_t2• 12 years ago

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.

SheepSlapper• 12 years ago

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.

matthewmacleod2• 12 years ago

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.

skriticos2• 12 years ago

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).

MadManE5• 12 years ago

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.

RogerL• 12 years ago

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.

danielweber3• 12 years ago

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.

simonebrunozzi2• 12 years ago

Unfortunately, this is true.

WettowelReactor• 12 years ago

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

greenyoda• 12 years ago

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.

x0x03• 12 years ago

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.

Swizec2• 12 years ago

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?

MadManE5• 12 years ago

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.

yxhuvud• 12 years ago

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.

otterley4• 12 years ago

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

zem• 12 years ago

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.

billmalarky2• 12 years ago

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.

keithpeter• 12 years ago

"...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.

marcosdumay• 12 years ago

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.

e15ctr0n• 12 years ago

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...

matthewmacleod2• 12 years ago

Wow - "Oops, we forgot to pay payroll taxes for three years" isn't good. How does nobody notice that?

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.

personZ2• 12 years ago

It's rather surprising that the IRS wasn't dramatically more aggressive about this. Every year they had people submitting tax returns claiming taxes paid that weren't paid, for years. I would have expected the IRS to have searched the Earth for this company.

jacquesm20• 12 years ago

The address was wrong. Probably a mistake, but that trick has been used on purpose as well.

smalter• 12 years ago

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.

sethbannon8• 12 years ago

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.

mattangriffel• 12 years ago

Great Jones and Bowery is in NYC ;)

dreamweapon3• 12 years ago

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.

SilasX2• 12 years ago

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

reborn426• 12 years ago

they notice that? ;-)

coderzach• 12 years ago

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

dreamweapon3• 12 years ago

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.

jgreen10• 12 years ago

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.

Domenic_S• 12 years ago

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.

sbisker2• 12 years ago

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 :) ]

recalibrator• 12 years ago

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!

tptacek13• 12 years ago

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.

gatehouse• 12 years ago

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.

dreamweapon3• 12 years ago

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?"

ugh1232• 12 years ago

it is plausible for someone who is administrativaphobic

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

seancoleman• 12 years ago

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.

tptacek13• 12 years ago

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

slantyyz• 12 years ago

> 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.

forgottenpass2• 12 years ago

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

nyc_str8tsh00t6• 12 years ago

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.

bilalel• 12 years ago

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.

lauradhamilton• 12 years ago

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.

jasonlaramburu2• 12 years ago

Wow, sorry to hear about all this. Are you going to return the remaining investor money?

budu3• 12 years ago

I don't think he's out of business yet.

DanielBMarkham2• 12 years ago

Seth,

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.

sethbannon8• 12 years ago

Thanks, Daniel.

tptacek13• 12 years ago

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.

Aaronontheweb• 12 years ago

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.

DanielBMarkham2• 12 years ago

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.

vonmoltke• 12 years ago

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).

will_brown• 12 years ago

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.

tptacek13• 12 years ago

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.

mynewwork• 12 years ago

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?

extesy• 12 years ago

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

larrys8• 12 years ago

"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.

jacquesm20• 12 years ago

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.

walshemj• 12 years ago

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.

x0x03• 12 years ago

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...

tptacek13• 12 years ago

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

aaronblohowiak• 12 years ago

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.

pavlov• 12 years ago

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.

jakejake4• 12 years ago

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.

wpietri3• 12 years ago

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.

josu• 12 years ago

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

roel_v5• 12 years ago

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.

tarr11• 12 years ago

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.

wglb• 12 years ago

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

larrys8• 12 years ago

"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.

jacquesm20• 12 years ago

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.

beagle3• 12 years ago

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.

UVB-762• 12 years ago

Although a valuable cautionary tale, is it really wise to make a post like this, associated to the company name, for the whole world to see?

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.

ajb• 12 years ago

Really uninformative headline. Hmm, what would be better? Maybe "Management Mistakes Founders should never make" (not all of use are reading this for the startup stuff, believe it or not)

thom• 12 years ago

You shouldn't really be able to go through a startup accelerator without someone hooking you up with an accountant... much less raise millions of dollars of investment.

fredsters_s• 12 years ago

"I’ve come to realize that “technically true” is a terrible ethical measure for a (non-technical) statement. I should have held myself to a higher standard. I’ve also learned the importance of overwhelming honest"

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.

jacquesm20• 12 years ago

This is why you pay an accountant the big bucks and pray they don't mess up in turn, very frequently if they do the responsibility is still yours. Running a company comes with a lot of responsibilities that tend to keep you awake until the small hours of morning. Details like these can get you, especially because they are retro-active and hardly anybody is in a position to absorb an instant loss of say 7 years remittances for the 100 employees they have. Be very grateful that it wasn't a huge amount of money, bigger companies have failed over things like this.

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.

Qantourisc• 12 years ago

This practise is in my opinion SO wrong. There is a saying: "... as humanly possible" in other words people make mistakes !

jacquesm20• 12 years ago

In the eyes of the tax man there are no mistakes. There are only audits and fraud. Better have your stuff in order when that audit rolls around anything more than a few pennies out of line and you'll be looking at months of extra work even if you're a small company. Looking back at a decade or so of your paperwork will turn up a ton more that you'll have serious issues documenting if you didn't take care of it at the time.

That gets expensive in a hurry (tax lawyer, fines, interest, surcharges).

mhartl2• 12 years ago

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.

ajaymehta• 12 years ago

Kudos, Seth. Really refreshing to see this kind of bare honesty, and takes a lot of courage to know that this post will probably be seen by all friends/family/coworkers. Thank you for writing this.

sethbannon8• 12 years ago

Thanks Ajay.

danielweber3• 12 years ago

No matter how smart you are, the only way it makes sense to do your own taxes is if your business is taxes. Otherwise, hire the woman who spent years learning this stuff and devotes her entire cognitive load to the task to do it for you.

jacquesm20• 12 years ago

Absolutely. And then you still check on them to make sure it is all done 100% right. You are responsible.

bellerocky• 12 years ago

On the co-founder thing, being a "co-founder" doesn't mean you're also endowed with as much authority as all the othe co-founders. In most circumstances one of the co-founders should be designated as the one in charge, given the responsibility of making the hard decisions.

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.

jakejake4• 12 years ago

I actually enjoyed this article and it's definitely reassuring in a way to read about other people's struggles. I have to take minor issue with the "entrepreneurs don’t talk about their most difficult moments publicly" part because it seems like there's an abundance of articles lately from founders who write about their stress, depression, failing startup, etc. I feel like I see more of these articles than success stories. Even the success stories I've seen lately are more of the tone "we had to really go through some shit to get here."

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.

tomp2• 12 years ago

Can someone clarify why dropping out of Harvard Extension School is a subset of dropping out of Harvard University? I checked out Wikipedia, but it's not very clear about Harvard's system and the different colleges (Harvard College, Radcliff College, Extension School, ...) I've always assumed there was just one "University of Harvard", but apparently it's more complicated...

pjungwir3• 12 years ago

Harvard Extension School is an adult education program, like night classes. Your teachers may be Harvard faculty (but never were in the 7 classes I took there), and the other students are not Harvard undergrads. Also there is no application: they take anyone with a credit card. (There may be an application if you want to earn a degree rather than just take desultory classes; I don't know.) That's all not to say the classes aren't very good, but it's not the same as "getting into Harvard."

tomp2• 12 years ago

So what does "getting into Harvard" mean - getting into Harvard College? What about the rest of colleges besides Harvard College and Extension School?

slg4• 12 years ago

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/

pjungwir3• 12 years ago

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. :-)

afarrell• 12 years ago

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.

slg4• 12 years ago

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.

ColinCera• 12 years ago

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.

freerobby• 12 years ago

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.

sbisker2• 12 years ago

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).

ehurrell• 12 years ago

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.

SomeCoolName• 12 years ago

This was a very useful read, thank you!

ugh1232• 12 years ago

That was a very useful comment, thank you.

_RPM• 12 years ago

Seth,

I really enjoyed reading your article. It was extremely insightful, and I hope to read more articles posted on your blog in the future.

ChuckMcM2• 12 years ago

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.

sethbannon8• 12 years ago

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

curiousDog• 12 years ago

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

matwood• 12 years ago

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.

larrys8• 12 years ago

"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.

pyre2• 12 years ago

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)

WalterBright• 12 years ago

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

People without honor, well...

malyk• 12 years ago

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.

Tactic• 12 years ago

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.

ameister142• 12 years ago

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.

jakejake4• 12 years ago

We had a deal with our landlord for paying a reduced rent amount for one year, after which it would go up by $1,500 per month. Well, we had quite honestly forgotten about the deal and the same automated rent payments just kept going through without a word from anybody. About TWO YEARS later our landlord came to us and said "oh yea, remember that rent deal we had? You guys owe us about $36,000 in back rent!"

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.

rdl• 12 years ago

83b elections and payroll taxes are the only two things which are really really critical from an administrative perspective, in my experience, and can't be fixed later with fairly minimal cost.

krebby• 12 years ago

I interviewed at Amicus last year and they were clearly some of the nicest guys in tech. It's always hard to read stories like this but it's especially tough to see a good idea go under. Best of luck to everyone involved.

rmcfeeley• 12 years ago

Thanks for the brave post, Seth. Glad to see all of the support here, deserved, and appreciate your honesty. Best wishes for the days ahead

lowglow2• 12 years ago

I'd like to hear the co-founder's stories as well. I think this would give us a complete story of the situation.

lowglow2• 12 years ago

I love that "hearing the full story" got downvoted. hah

subdane• 12 years ago

It would be really interesting to hear Seth's former co-founders response to this well written piece.

simonebrunozzi2• 12 years ago

Yes, but at the same time, this is not a trial or an execution. Let's not bee too harsh (some of the comments above clearly are).

xcubed2• 12 years ago

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.

lifeisstillgood2• 12 years ago

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.

efuquen• 12 years ago

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.

rwallace3• 12 years ago

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.

king_jester2• 12 years ago

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.

mortenjorck• 12 years ago

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.

nyc_str8tsh00t6• 12 years ago

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.

dsugarman• 12 years ago

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.

sethbannon8• 12 years ago

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.

afro88• 12 years ago

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.

napoleond• 12 years ago

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!

xcubed2• 12 years ago

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.

nostrademons2• 12 years ago

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.

anemic• 12 years ago

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.

wavegeek2• 12 years ago

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 ...".

watwut3• 12 years ago

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.

mikeash5• 12 years ago

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.

krytork• 12 years ago

This guy is totally irresponsible. The thought that he had the financial well being of other people in his hands makes me sick. There should be a law that prevents people like this from starting another company.

michaelvkpdx• 12 years ago

Poor founders and your VC-funded pain.

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.

JabavuAdams• 12 years ago

They shared a piece of their humanity with you to help you in your dream.

... and got paid for it. Your company is not your family.

lutorm• 12 years ago

You really skimmed the post so quickly you didn't notice any empathy with the employees?

dayjah• 12 years ago

I often find myself saying the following: "We are the sum of our mistakes, though to re-offend is to not have learned".

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.

mrgriscom• 12 years ago

This guy sounds like a complete sleaze. I appreciate that he wrote the article, as it did contribute a few moments of my day's HN entertainment, but I don't understand the praise being heaped on him. Simply "coming clean" is not commendable, in the absence of any discernible remorse. In the end you just feel like someone is still being played.

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.

todayiamme• 12 years ago

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.

MortenK• 12 years ago

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.

aidos• 12 years ago

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.

7Figures2Commas• 12 years ago

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.

argonaut• 12 years ago

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.

nwenzel• 12 years ago

Poor bank UI crushes startup's bank account.

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.

https://zenpayroll.com/

jlevy2• 12 years ago

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.

jacquesm20• 12 years ago

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).

calibraxis4• 12 years ago

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.

tlrobinson• 12 years ago

"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."

http://www.paulgraham.com/founders.html

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

nyc_str8tsh00t6• 12 years ago

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.

lambda3• 12 years ago

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!

jon2512chua• 12 years ago

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?

temp12345• 12 years ago

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?

megablast• 12 years ago

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.

pygy_• 12 years ago

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.

jlevy2• 12 years ago

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.

sethbannon8• 12 years ago

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.

jasonlaramburu2• 12 years ago

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.

lifeisstillgood2• 12 years ago

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.

infoseckid• 12 years ago

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.

jozefff• 12 years ago

Dang, that's rough Seth. Thanks a ton for sharing though. It's hard enough to go through those kind of struggles, but to be honest and let others know the difficulties you faced and own up to mistakes you made is really valiant. Kudos to the max.

MattBnB• 12 years ago

Such an awesome article. Minimal, simple and well said. Taxes would suck to f up

jeffcrigler• 12 years ago

Seth shows a lot of courage to do this. I have done three start ups. My first one was successful and got bought by Lexis/Nexis... but it wasn't very lucrative. The second one was a complete disaster and I spend $40 million on a pipe dream and my VC's had to take me out. The third one was a success still waiting to materialize as it was sold and I have yet to see the dividend. But at ever step i made lots of mistakes (including falling behind on payroll taxes) and each of these were learning opportunities. I give kudos to Seth for sharing this and am more hopeful now than before that he can make Amicus successful in the long term.

lambda3• 12 years ago

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.

dheer01• 12 years ago

Seth - Thanks for sharing your perspective - its extremely courageous to talk about these things in the open.

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.

chetanahuja• 12 years ago

The whole kerfuffle about Harvard Extension vs Harvard College just lays bare the awful reality of the value of college education today. It's basically about acquiring a brand-name on your resume. Especially in the US system, the university branding says very little about the merits of the graduates (since admissions process is a colossal clusterfuck where a very large number or rejected candidates are objectively academically superior to a very large number of accepted candidates) and everything about our obsessions with exclusive clubs.

andrewstuart• 12 years ago

Let he who is without guilt cast the first stone.

Mistakes You Should Never Make

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