Beware self-funded Startups: failure can haunt you for a long time

[StartingOver]

After years of success and decline, I'm stuck with over $150k in debt when we didn't bring our expenses down as fast as our income dropped. It didn't help that not everyone on the team was exposed equitably to our debt instruments (all personally guaranteed, such is the only way in a new company). I had better credit, and even though I own a smaller part of the company, my credit lines were the ones that got expanded (which I didn't even know was happening).

After stripping expenses to the bone, the business might slowly pay off it's bills, say after ten years or so. It does have millions of users after all. Which means that this debt will haunt for years, and I can't just leave it all behind, I'll have to deal with maintenance, etc, for the foreseeable future.

My business partners bought homes at the peak, so between the business and home, bankruptcy is looking like their option (I was not so, uh, unlucky in my timing and have equity). Either way sucks.

And now I'm looking to do something new. And while failure might be rite of passage in startupland, hiring someone with such unrelenting financial pressure is not really likely, is it? And the credit report problems (business cards get switched to personal cards when not paid on time, and guess which ones of them all didn't get paid on time? Yeah those with my SSN) will cause problems with a corporate job, as credit reports are such a big thing in hiring these days.

Lesson learned: get investors; share the wealth, share the risk.

So HN: what on earth do I do now?

[Maro]

With all due respect, I don't think those are the correct lessons to be learnt.

The lesson is: don't take on debt. Get investors. If you can't get investors, bootstrap, do some gigs on the side, and use that money to run the company. Then, get investors. If you can't get investors, well, repeat until...

If you do this for a long enough time, and the idea, product, company, team and timing is right, you will be able to get investors. If not, that's the world telling you that it's not such a hot idea, product, company, or whatever. Take the hint.

This is exactly what we did, and are still doing. Unless you hit gold, it's slow as heck. But still, I'd never take on personal debt for my startup.

[alain94040]

Don't take on debt secured by you personally. Your business should take on the debt. I know it's easier said than done, because no one will loan anything to a business with no revenue.

By agreeing to personal debt, you pledged personal money that you didn't have. I guess different people have varying levels of risk, but I don't invest money I don't have.

[StartingOver]

There is another important lesson: you can't get business loans or credit cards (the big culprit here) without personally signing for it. BUT: there is probably some point in time that changes, and you should be on top of things and cancel the original. Too late now.

[StartingOver]

Another lesson: you may think it is a business card (it is), but surprise! They can convert to personal (read the fine print).

[Maro]

Use debit cards. It will only allow you to spend money you have.

[mgkimsal]

"millions of users" - is that serious, or sarcastic? I couldn't tell. If you have millions of users, I'd suspect you can find a way to monetize them a bit more than what you already are to get that $150k debt down faster - perhaps even a direct appeal ala Wikipedia.

While credit checking for hiring does happen, it doesn't happen everywhere, and you can likely explain your situation reasonably such that it doesn't become an automatic strike against you. There may be some jobs that are not available to you now - you might not get a defense contracting gig - there are others.

Is the $150k split between the 3 of you ($50k each roughly), or is your share of the debt $150k (as in it was $450k)? The rest of the team probably won't want to voluntarily take on more debt, but they might be willing to help you pay down some of yours voluntarily, assuming that they don't have their own $150k chunks to attack.

What are your skills? It's not uncommon for a sr-level programmer with in-demand skills to be able to pull in $100k+ doing freelance or contract work, and even with other expenses, you can probably have this $150k taken care of in 3-4 years.

Also, have you talked to your creditors to see if any will forgive some of the debt? They may 1099 you for the difference in some cases, but paying tax on, say, $10k of forgiven debt is different than having to pay $10k.

I feel for you - I've been in that situation, just without so many zeros. :/

[cullenking]

Don't underestimate the power of appeals for donations. We have a small userbase (26k), and make about $1000 a month in donations. Granted it's in a easily monetizable sector, with dedicated users, but I would think the sheer number of users you have could get you a decent amount of donations.

[StartingOver]

I wasn't being sarcastic. It is just not an easily monitizable space.

It is $150 total, but the way credit was signed up, almost all of it is guaranteed by me. I am looking into consolidation (and partial forgiveness), that might make it entirely mine and that might just be worth it. Take full responsibility and take full action.

[mgkimsal]

While taking it all on might suck, it's totally under your control at that point. Having your credit info impacted by the decisions and actions of others can be painful.re: sarcastic - just wasn't sure how to read what you'd written.

re: monetizing - wikipedia isn't easy to monetize either - which is why they do the appeals. Without knowing your situation, I can't presume to tell you what to do, but you may find a sizeable chunk of people willing to help donate to offset your debts, perhaps in exchange for a guarantee of continued service.

re: 150k - I hope you're able to get that reduced (via forgiveness, consolidation, whatever) quickly - perhaps to $100k soon. There are a number of stories of people getting through debt quickly on various personal finance blogs. Perhaps some of those may serve as motivation from outside the tech-o-sphere.

Best wishes to you on that difficult journey.

[maineldc]

Wow, this is a tough read. I know things look bleak right now, but I think you need to step back and realize that things are going to be fine.

First off, start looking for a job. I know that you are worried about credit reports, etc, but if you are good, someone will hire you. Don't assume that you will fail to find a job because of this.

Second, consult someone knowledgeable about bankruptcy. I don't believe your house will be at risk and you will be able to start fresh without the debts weighing you down. Bankruptcy isn't a personal failure (this is possibly a controversial statement but I strongly believe it).

In short, don't give up, don't assume that job search is hopeless before you start looking, and just try to make progress a little bit every day. In a few years this will be distant memory.

Good luck.

[StartingOver]

Thanks for those words. :)

[cabinguy]

If you have some money, you can negotiate your credit cards down to almost nothing (eg $30k = $4k payoff). Call the credit card company, tell them you have $X (X being about 10-15% of your balance) and you are calling all of your creditors to see who will take it as payment in full. $X is all you have...and if they will accept it, you will send it to them...otherwise you are sending it to the next card on the list.

It will be a little scary making that first call and making such a low-ball offer, but it is where you want to start and you will be amazed at the results...I guarantee it. Be sure to get the accepted deal in writing before sending any money.

This is a tough thing to go through. As an entrepreneur, you have to be able to compartmentalize these types of problems. Put these problems in a box, put the box on a shelf, and continue to build things and solve problems. Don't forget about the box, but set it aside and refocus on kicking ass. This is just a wall. You will run into a lot of walls on your journey. Walls are not there to keep us out, they are there to keep those who do not want it bad enough out.

tl;dr It's not over until you quit. Never quit.

[gte910h]

Sounds like you need cut bait and run and to declare personal bankruptcy.

In 3 years of reasonable payments you will have all your debt gone (or if you have no assets outside a house and cheap car, chapter 7 even, with your debt gone near instantly).

Chapter 13 doesn't last a long time, and was designed for your case. The point is not to take a productive citizen and hang upon a yoke of debt for much of their life.

In either case, with 150k of debt, you're going to be in the credit crapper for much longer by NOT declaring bankruptcy.

Random google page on the difference between the two: http://www.creditinfocenter.com/bankruptcy/chapter13BK.shtml...

I've known a couple people who went through bankruptcy, and all of them have felt much better afterwords, both immediately and years later.

[jellicle]

> The point is not to take a productive citizen and hang upon a yoke of debt for much of their life.

That may have been true once upon a time, but is certainly no longer true since the 2005 bipartisan bankruptcy reform law, which had the specific intent of hanging yokes of debt on productive citizens.

[cma]

They went through pre-Bush bankruptcy-law bankruptcy or post?

http://msnbcmedia4.msn.com/j/msnbc/Components/Photos/050420/...

[gte910h]

One I'm sure was before it, not sure on the others.

[StartingOver]

The answer to that can make a big difference.

[gte910h]

Talk to a bankruptcy lawyer. Initial consultations are free with almost all lawyers. Bring tax returns, summaries of your income, etc.

I honestly don't know about the other two. I know one of them was pre-2005 law.

[DevX101]

You asked us, "what on earth do I do now?". I recommend you start another post and change your question to "how do I monetize millions of users?".

Give us a description of your market without revealing your business of course, customer profile (age, income, etc) , how much information you have on them (do you have emails? location? interests etc), and how much time they spend on your site.

I'm sure you'll get much more practical and useful advice from that thread on solving the problem rather than the commisseration here on your bad situation.

[StartingOver]

Very true! I will wait a week and gather those thoughts for a post next Sunday.

Of course, it's not that we haven't thought of things, but how much good time do I want to throw after bad?

But how insular I have been to not think first of posting that question. Thanks!

[neworbit]

You may very well be able to sell the company simply for the user base...

[schan]

There are plenty of startup founders that got their credit ruined before like Max Levchin. It got to the point where "a ruined credit history prevented him from buying a car, getting a cell phone, and renting an apartment." However, "Levchin kept going without much downtime." Levchin says: "Every time I had torn up my certificate of incorporation… the delay between that and registering a new company was typically no more than 24 hours."

http://gigaom.com/2010/08/06/max-levchin-says-embracing-fail...

Levchin's 24 hours might be extreme to follow, but we can definitely learn from his relentlessness. As for $150k in debt, creditors nowadays are pretty used to arranging settlements. You might be able to arrange some payment plan with them and reduce the debt to under $70k. A big part of it is interest and fees that they tackle on so they would rather remove that and work with you than watch you default. So given you get a job (startup jobs don't check your credit as much) you might be able to fix it in 1-2 years without declaring bankruptcy.

I know how demoralizing it can feel but you are definitely not the only one and will emerge stronger after you get over it. Look forward to seeing blog posts/interviews about how you struggled and overcame your debt when you rise again.

[pedalpete]

How did your credit line get expanded without you knowing it?

A key detail I was not aware of is 'business cards get switched to personal cards when not pain on time'. That's a bit one that we should all be aware of (though I don't have a business card yet, good to know).

[alain94040]

This is not how it works. When you open your business credit card, make sure it's not a personal credit card in disguise. The credit card needs to really be linked to the business. Then, iy cannot be switched to personal, ever.

The trick is that many credit card companies will be happy to extend credit to you personally (your SSN), and agree to print a fancy "company name" on the card, so it makes you feel important. Wrong approach.

It's simple to tell: if you provide your SSN, you lose. If you only provide your company's EIN, fine (and read the small print).

[StartingOver]

Yes, good to know. They kept things under the EIN until it went unpaid, then they switched to my SSN. That got my attention, of course, and I've learned a lot since then.

[mgkimsal]

I've had credit lines expanded on me with just a letter in the post saying "we've upped your credit line". I didn't ask for it. Granted, I still keep up on stuff regularly, and noticed quickly, but it wasn't something I applied for. In some situations, I can imagine a busy person not noticing for several months.

[StartingOver]

Yes, particularly if you aren't the one doing the financial reports (which stopped by the way, along with bills getting paid, etc., etc).

[samh]

You firstly need to realize that mood is like the weather, it's never permanent.

You have some real practical problems to deal with, but no more than lots of people, no more than lots of people who you admire have dealt with.

You need to talk to the organisations you owe money to, you need to negotiate a payment plan you can actually afford.

You need to listen to this interview with Rand Fishkin, http://mixergy.com/seomoz-rand-fishkin-interview/ in which he talks about being in debt.

Look yourself in the mirror, are you really exhausted and out of ideas ? I don't think so, I think you're just getting started.

[StartingOver]

Thanks! It took longer to accept the situation I'm in, than it will be to start doing new things, I hope.

[ig1]

Can you raise investment or sell the company outright ? - if you've got millions of users then it might be viable route.

[StartingOver]

Sell might be an option. One of those things where there was an offer a while back, perhaps they will take it for a song. But otherwise, how to go about it?

[ig1]

It's hard to say without knowing more about the business, but assuming you know who your most likely acquirers are get a contact within those businesses and approach them directly.

Who do you primarily owe money to ? - if a significant chunk is to a supplier then you might want to see if you can negotiate a deal with the supplier writing off the debt in exchange for equity in the company.

[StartingOver]

Banks!

[lordmatty]

What you have been through sounds terrible. I can imagine you a feeling very burnt out.

However, once the smoke has subsided I'm sure you take positives from this. If you need a salaried job, I suggest you look for a medium sized company that would value your experience, rather than a large corporate.

[StartingOver]

Yeah. Funny thing though, in all my life I've never had a resume, always things found me. It doesn't feel like it will be that way now, but I Aldo understand that I'm having some very strong feelings at the moment. I'm not much of one to hold on to them too long though. perhaps to a fault. I'll be refreshed by new year, but want to burn through all the dark parts now and leave as much behind as I can.

[bbbbbb1212]

As others have written: I've been there, I survived, I learned a lot.

Carefully look at the debts and your resources and prioritize. (Secured debts and bills on active accounts (like current utilities that could get shut off) have to be paid first.) Then do what you can to whittle away the debt. Read up on debt collection tactics and law so you can tell who can really hurt you and who is just bluffing.

Then just hang on for a long ride. Eventually you will have deals with all the creditors and hopefully no new surprises will show up. [The possibility of new surprises showing up was a lingering fear for me - one extra unknown "debt" showed up almost a year later, but fortunately I was able to convince them that I was no longer guaranteeing the account when the charges were made. Which was true.]

As a backup, I had looked into bankruptcy options and positioned myself to protect myself (as much as is possible) while going through it.

IMPORTANT: set up an extra bank account at a different bank and use it to pay debts. You do not want the creditors to know where your money is. When you are negotiating a deal and/or a payment plan and then following it, you do not want them to be able to see if you have more money (even though it is not legal, it is still easy to find out how much money someone has in their bank account.) If the creditors have already been paid from your current accounts, then open new accounts at a new bank for your personal use and use the old one for debt paying. Only load the debt paying account with what is needed.

[Important - make sure the account does not have ANY overdraft protection - any overdraft should be rejected. Many creditors will accelerate the payments (and claim you agreed to it) to try to grab more before other creditors get it - this happened to a friend of mine; they agreed to a series of payments and the creditor simply submitted the whole batch each month to see how many would clear.]

When negotiating, make your starting "debt" for negotiation the actual amount owed. The creditors will use an inflated amount (including a LOT of interest and penalties) as the starting point so you will have to get 25 to 50% reduction just to get the the original debt amount.

[ScottWhigham]

"When negotiating, make your starting "debt" for negotiation the actual amount owed. The creditors will use an inflated amount (including a LOT of interest and penalties) as the starting point so you will have to get 25 to 50% reduction just to get the the original debt amount."

Can you explain this a bit more? I'm not sure I follow it.

[talkeinan]

You need to share more info. What do you think about the business in general? How your co-founders feel about it. Are you all at a point of wanting to call it quit because you don't believe in it anymore, or is it simply the debt that makes is all seem like a bad movie.

You need to be honest about the business. Selling a business when all founders want to get out is HARD if not impossible. If however, at least some of you want to keep at it, you might consider selling your shares (or part of it) rather than the entire business.

[StartingOver]

One of the three would go with it if he wanted, or it were possible. But with two bailing for sure...

[Rantenki]

How do you define millions of users? Daily visits, daily hits, monthly hits, hits ever, db user entries, active sessions....

If you have millions of active users, and can share some information about how active they actually are, the users here may have some good ideas on how to monetize better.

If OTOH you have had millions of visits over some very long period (and not repeat users), perhaps a chapter 13 makes sense.

~ $15k/yr income is not enough to justify maintaining any but the most minimal of web applications; how much do you pay yourself?

[StartingOver]

Millions of visitors a month, and millions of registered users (not the same set, only a fraction of the visitors in a given month are registered). Freemium model. I'll post another question next Sunday on how to monetize, as now I see that perhaps that should have been the first question. Not that we haven't worked over the issue a million times, but we haven't had fresh perspectives at all.

Getting paid? Hahaha. Not now.

[StartingOver]

Thanks to everyone commenting on this, even though it is a few pages back on "new" and not on the home page. You all rock!

[kitcar]

Have you thought about getting investors now?

If you don't think the business is attractive enough for investors, then the bad decision wasn't that you didn't get investors, it was that you picked the wrong business.

[StartingOver]

Too late for investors I think. And it wasn't so much the wrong business per se, we didn't shift when the market did, and later we didn't give up when we should have.

[patrickaljord]

> Lesson learned: get investors; share the wealth, share the risk.

Or go to a 3rd word country and live happily with $0 of debt like me ;)

[ohashi]

Try again?

[StartingOver]

Eventually, thus the StartingOver handle. :)

[haploid]

Been there. Destroyed my credit right out of the gate when I tried to run a web development firm in 1997 on student credit cards. Was threatened with eviction twice, and eventually was forced to move. Was fired and subsequently sued for $millions from/by a dot com in 1999 at a time when I literally had a negative account balance. I had dropped out of school to pursue my ambitions, so I had no degree to fall back on in order to secure a well-paying "job".

Disclaimer: the following is intended to be inspirational, not boastful.

13 years later, I am partner in a profitable ecommerce enterprise, after having put a startup success notch in my belt in 2004. My credit score is pushing 800, and I no longer even think about money.

My point is, your life isn't over, no matter how much it seems that way. It doesn't take long to bounce back.

[StartingOver]

It is because of my 800 credit score that the cards in my name were upped automatically. Too much of a good thing! It is now 590.

Thanks for the inspiration! Just knowing recovery is possible is half of the mental battle. I look forward to making such encouraging words myself at some point in the future.

[haploid]

Sorry, I never answered your actual question.

First, learn from your mistakes. It sounds to me like you negotiated your current deal poorly. Next time around, if you are committing or risking more to a given project than your other partners, you ought to demand more in return.

Second, monetize. If you have the userbase you say you do, $150k can probably be whittled away very easily.

Third, if your userbase is somehow unmonetizable, there is always the option of selling into a bubble. To be blunt: find a sucker and sell. Just be aware that the ONLY time anyone should ever do this is if they have lost faith in their business model. If you are still passionate about your idea, DO NOT DO THIS.

[chailatte]

Take out equity loan against house, pay off your credit card. Be ready to walk away from your house if you have to.

[alain94040]

Bad advice: trade a non-secured debt (credit card) by a secured one, so that indeed, you may lose your house, whereas before you weren't actually losing anything (bad credit is annoying, but doesn't force you to become homeless).

[chailatte]

Housing prices will fall 50% in the next year or two.