Ask HN: My startup failed. $9k in debt and need to pay most of it in 12 days.
A startup that I am part of failed. Prereq: USA, C-Corp in Delaware. We have $6k in server fees to Rackspace and $3k in debt with our lawyer. We also have a huge amount of credit card fraud that went through our credit card processing account/merchant account (like $8k), which is going to be an ongoing issue for the next year+ and may end up in me and my SSN being blacklisted from Visa and Mastercard.
I used to be able to cover this kind of failure, but over the past few months, I've sunk tons of my money into this company and completely depleted my checking and savings accounts.
The account goes into collections in the first week of October (which means my credit will be destroyed). I will be leaving the startup after I sort everything out.
I need a way to make this $6k in about 12 days. My savings is shot. I have some consulting (WordPress, PHP, Rails) money coming in, but it's only $1k and might not even be on time. My co-founder owns a majority of the company but he's traveling so he's a bit unavailable.
This seems to be the "low" of that rollercoaster we call serial entrepreneurship. Thank you for your help, Hacker News.
EDIT: I'd just like to say that I'm using a throwaway because I'm pretty well known on HN, which makes this pretty interesting. I usually read these kinds of Ask HN posts and think "ouch"—funny to be on the other side.
EDIT: I'll respond soon, HN is giving me the "You're submitting too fast. Please slow down. Thanks." thing. I'm reading all your comments—they are not going unnoticed. And thank you.
164 comments
[ 2.9 ms ] story [ 200 ms ] threadExplain that sending it to collections is bad for you and them. If you don't have the money, then you don't have the money. But if also have to deal with a collection agency then you'll have more stress to deal with. Also the collection agency gets a cut of your (current non-existent) money owed.
If you can explain that is in both parties interest to keep it out of collections and extend the deadline or work out a payment plan, you may be more likely to get out of this situation without damaging effects on your credit.
They know that you have a limited amount of money and the chance you actually paying decreases as time goes by.
I don't know what the usual legal proceedings are to declare bankruptcy, but this is why they have bankruptcy laws and limited company.
Speak to a bankruptcy lawyer. Presumably all of this is your company's debt, not your own personally, and you have not committed fraud or done anything illegal, so hopefully you're in the clear personally. It may even work out that your cofounder is the one who ends up with a black eye on his credit record if he's the majority shareholder and ends up being the person named in the bankruptcy.
You haven't specified what country you're in. I'm guessing US. From the little I know, bankruptcy protections are pretty great over there. In the UK, if you take a company that you're a director of bankrupt, you aren't allowed to be director of another company for 5 years.
I'm not familiar with the details of bankruptcy either. Will this damage my name and the name of the company?
Well, I'll probably be the guy named in bankruptcy, since my cofounder is in the UK.
Yes, I am in the US. Ouch, that sucks, see directly above.
It's part of doing business really. Creditors really don't like corporate protection (for obvious reasons) so it's pretty easy to get yourself into a situation that they're seeing... although the high number of charge-backs is something of a head scratcher.
I'm sure that you've thought of this, but is there any by-product that you can sell out of the company? Any IP liquidation?
Take care.
Which makes it more stinging and 500% more embarrassing. But that makes it all the more interesting, huh?
It's interesting. I licensed my technology as an SP to be used with this company, so all of the IP is mostly, well, mine. I have thought about it, but haven't reached a decision.
When you've got your breath back and blood pressure is approaching normal, consider opening up about it. While you may not be able to talk about all of it for legal reasons (eg it seems like your partner was rather dubious), sharing what you have learned from the experience, what red flags you saw but why they didn't seem worth stopping for etc. is valuable to many people. I'm easily embarrassed myself, so I know it's difficult; but don't fall into the trap of anticipating only the negative possibilities, and cutting yourself off from the sympathy and support of people who like you.
Now, I don't mean 'Tell HN: OK it was me ohgodImsorry'; you don't need to humiliate yourself! Take a long bath/walk on the beach/whatever, and let go of the situation for a few hours. You poured your own money into it in an attempt to keep things under control, and it was just just bigger than you were. What happens next is in the hands of others, and you can influence but not control it. Then write your creditors, mostly the same letter, and tell them what you told us - you owe this much to these different people, you have lost a bunch of your own money, [EDIT: I misinterpreted the stuff about your co-founder, as if the person had bailed on you.], and you're sorry. Express your willingness to pay it back ASAP, but stress that you wish to do it on a pro rata basis. Of course every creditor would like to be paid first ahead of the others, but making the same information available to all indicates you have nothing to hide and is more reassuring than a non-credible promise to put someone first. If you can afford it, a small check to each, even $25 or something, speaks volumes.You might want to write to the IRS and the city or county that issues your business license too - if you're not sure what to tell them, call and ask what your obligations are. You may be surprised how helpful they can be. you can call them today and get the letters out before you go to bed (go buy some stamps if you need an excuse to get up and walk around). Then, sleep the sleep of the just. Get up tomorrow, eat a healthy breakfast, and start composing your 'How I lost a kajillion dollars and what I learned as my business followed it off a cliff' post , on your existing blog, Posterous, wherever. Throw in a couple of ironically entertaining pictures. It's not a funeral notice because you're not dead - you are now a man or woman of experience, and that experience has a value. Get that up over the weekend, realize people still like you, and on Monday you get back to work.
Your job for the next week is to contact the creditors again, ensure they all have the same information, and politely but firmly stick with the pro-rata approach. Whether they agree or no, ask for their decision in writing so you can send copies to the other creditors. By the way, since it sounds like you're not in debt on your personal accounts, consider dropping by your own bank and asking a manager for advice - since they won't actually be trying to collect from you, they may be more forthcoming about how they evaluate situations like that, and heaven knows they've had plenty of experience lately. Allocate 50% of your time to debt service, and the other 50% to making some new money. That can include chasing consulting/programming work, but your existing business still has value. Call business magazines like Inc. people like Andrew Warner etc., and say you have an interesting story - use your war story post and the feedback you received on it as your raw material. Hell, call Techcrunch, because they can't milk that SuperAngel scandal forever so you might as well work the publicity angle and give them an interview. 'Life after death' is a perennial story and even success junkies need one every so often. How about your startup's business model? Your actual business may have fail...
That may not even be needed.
Well, actually this happened. It was tempered by lots of people being nice, offering condolences, giving good insights, a few job offers, and even some people looking to start up companies together, but lets not pretend the mob didn't come out with their tar and feathers.
That said, I fully agree with the sentiment. Failure is perfectly acceptable, a natural occurrence in a risk-taking industry.
I understand why you're reluctant to name the business, but you may want to reconsider since you're probably too close to the situation to clearly identify all of the possible assets.
Rather have a way to pay back this $6k.
Minority shareholder, so he's protected anyway, no way this could be laid at his private door, unless there is outright fraud on his account.
This is what would be scaring me more than any of the debts. Almost no bank will open a new merchant account for him if he's on TMF/MATCH, and that includes if he's just one of several owners of a future company -- merchant account applications ask for a list of all principals for just this reason. He'll find his way out of the debt problem, whether it's through bankruptcy or repayment, but being listed on TMF/MATCH can prevent him from starting a new business that accepts credit cards for the rest of his life.
but he's not a company. and if he starts another one he can list somebody (or pretty much anybody) else as principal if I understand correctly:
http://answers.yahoo.com/question/index?qid=20070909074529AA...
a) Most lawyers, especially extending credit terms in the startup field, will carry over that debt with interest for years. Call and state your case, make it clear it's no-pay right now either way, but you want to fulfill your obligation in the further - say start making payments in 12 months.
b) RackSpace - you owe personally or through corporation? If personal, call them and have the same conversation - speak with a manager and ask for payment terms outside of normal, otherwise you have to default. If corporate consider folding and walking away, corporate protection is there for a reason and even though it's not a stand-up thing to do, Rackspace's world is littered with bankrupt startups.
c) Visa & MC may be your big problem, getting blacklisted from merchant accounts isn't the end of the world but certainly something to avoid. Also nearly impossible to reach a human that can make decisions on terms. For a startup they should have a 20% merchant reserve on your account anyways, how far does that take you?
Bottom line, think 6 - 12 month terms instead of 12 day terms.
No reason at all you can't get there with the right amount of sucking it up and pleading your case.
a) Yes, and I'm dealing with a startup lawyer, at a very well-known Silicon Valley law firm (this is when we had money). He's been very very patient with our lack of being able to pay the retainer.
b) Through the corporation. It's registered under the Inc and has the EIN associated with it. However, it also has my SSN associated as the primary contact.
c) Well, I have a feeling that most of our credit card transactions are fraudulent, being in the space we are in. (For example, someone charged $12k on a card and tried to cash out to PayPal.)
I'll call up Rackspace and give it a shot. Thank you.
If you had set out to create this situation on purpose that would be screwing people over, now all that there is left to do is to shut down as orderly as you can and to have everybody absorb an appropriate part of the loss.
Everyone takes risks doing people. Inability to pay is one. Bad people is another. The first is usually rarer and more manageable. The second is not so bad. You can avoid being in the second category.
*Mixergy interviewed a bankrupcy lawyer a while ago. Maybe there's something useful for you in it. One useful thing I remembered: Discounted debt is usually taxable. Be careful you are not caught off guard. http://mixergy.com/russell-demott-interview/
Regarding (b) if your SSN is associated that's one thing - it's still the corporations debt and you can walk.
If you gauranteed it via your SSN that's another story, and it will reflect on your credit.
What space are you in? Phone cramming or reg path reoccurring billing or something like that?
Best to not mix private and business when a company is already going down the tubes.
Your name can be on the paperwork, your company can be in debt, it can even go bankrupt, as long as you did not do something called 'mismanagment' or 'fraud' you should be good. Being a minority shareholder implies that even if you had wanted you could not have stopped it from going the way it did, unless you happen to be a signing officer of the company able to act on his own, but that does not detract from the above.
Puncturing the corporate veil to go after the private assets or credit status of an officer of the company is a very high threshold to meet, in the case of 'peanuts' debts like the one we are talking about here nobody in their right mind is even going to try.
On top of that, he would have to be an officer of the company that has put up a personal guarantee for any of the debt to rub off, if you do that you're silly and I assume that since there is a corporate lawyer involved here and that the company is a Delaware corporation that he's well protected from that angle.
A real life example: I am involved in the management of a commercial real estate property. We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report.
If you're not seriously involved in the entity, then none of this matters, obviously.
Side note: it's generally the norm for someone to personally guarantee a merchant account for a new business - I wouldn't call that silly.
In the case of a sole proprietorship I can see how that link would be made, but otherwise it is highly unlikely that a shareholder/officer would be affected in this way.
But you were under no obligation to do that, and you being the majority shareholder is also a key element here.
The OP is not a majority shareholder, as far as I can see has no obligation to go in to this now and it would be a very bad move indeed to get his name on any paperwork where he privately assumes the debt of the corporation just 'because his name is already on the paperwork'.
It would make it easier, not harder to tie this to him in the future.
If you personally guaranteed any of the company's debts --- and don't ever do that --- the story is obviously different. But if Rackspace invoices your company, you could own 99.9999% of its shares and most probably not owe a dime.
There are situations --- they vary from state to state --- that "pierce the corporate veil". Fraud is one of them, so is negligence, and so (in some crazy states) is payroll. What they tend to have in common is a tort: something an agent of the company explicitly did wrong to cause damages to another party. Signing a contract and not being able to live up to it is almost by definition not the same thing as a tort, which is why law students have separate classes in "torts" and "contract law".
A majority (but not sole) shareholder has a less hard time and a minority shareholder has nothing to worry about at all.
My experience has been that if you are a small, new corp, nobody will give the corp any credit without a personal co-sign.
I don't think it's silly to personally co-sign stuff. I mean, it's not something to be done lightly, sure, but if you need a lease, you need a lease. sometimes you need to take the risk
The take away is that a liability shield is not the same as a credit shield. Your credit will follow you, even if your debts do not. Some people care about this. Some don't.
For $17k, I'd surely think about my credit before walking away.
You are suggesting that he take out a private loan even though he's already committed his savings to this venture to the tune of $17K in order to protect his credit rating?
Worst case he won't be able to borrow money for a while, and he might not be able to get a mortgage or other financing.
Would you borrow money in order to be able to borrow money later? It makes very little sense to me, to pay back $17K privately (so that's after taxes) means that you'd have to be earning roughly double that just to get rid of this debt, at a regular salary and expenses that comes down to at least two years before you can get rid of that debt, not counting the interest.
How does that make any sense at all, is your credit rating worth 20K and two years of your life to you?
First, no. I'm not suggesting that he do that. I'm suggesting that it's an option on the table.
Different strokes for different folks. My primary income requires that I be able to secure large amounts of non-recourse debt, for example. A guy might have a wife who expects to be able to buy a house in the near future. Some may not care that the lawyer they hired worked 10-12 hours without getting paid. Others will. For some people $17k may take two years to pay back. Others, not so much. Some people just want to make good on their commitments if at all possible.
Not everyone takes the by-the-numbers view of debt (legitimate though it may be). Those who don't will consider you a deadbeat for walking. What's the cost of that? The answer is different for everyone, and counseling someone to consider the aftermath is just plain sensible.
And a serious question: Where can you get a merchant account for a new business that does not require a personal guarantee? I'd love to know.
How did the fraud occur? Who did it, where were they, and what did they do technically to steal from you?
Use the checks they give you, to pay down your debt.
This way you'll be down to 4-5K and you won't pay any interest on it for a year...which should give you plenty of time to get back on your feet
So its possible the OP had a good bit of time left on a contract, which he's now on the hook for. It would also make sense for Rackspace to take a smaller payment in such a case, as they wouldn't have rendered the services yet anyway.
I had to deal with a Rackspace account and bandwidth overage one week into a new billing cycle.
IIRC, it was something like $2.50 per gigabyte after the first 1.5TB.
The more you pay per month, the higher the limit, and lower the per gigabyte overage fee.
Somewhat akin to a US cellular telephone company (without bandwidth rollover bytes).
I'm not sure I understand what you are asking here. I'm sure Rackspace has many clients who run up charges well over $100,000 every month. RackSpace handles some very large clients. Recall that YouTube started out on RackSpace, and was on RackSpace at least till the end of 2006 (I forget the exact date YouTube left RackSpace). RackSpace actually invented a special low rate (regarding bandwidth), just for YouTube, but, instead of paying monthly, YouTube had to pay daily, in exchange for that ultra low rate.
I'd guess that RackSpace clients probably follow something of a power curve, with the top 1% of their clients using something like 30% or 40% or 50% of all the bandwidth that RackSpace sells. And of course, that top 1% would have very large monthly bills.
To clarify, this was a lot more than a single dedicated server. As I recall, the setup was more like a 6 servers, one was a dedicated database, then there were 4 web servers, plus one server that was dedicated just to SFTP, and then there was a firewall and a load balancer. I think the monthly bill was around $3,000 or $4,000. The $18,000 figure included a large amount of custom programming done by Rackspace. As I recall, at that time, Rackspace charged $150 an hour for custom programming, so it was easy to run up a big bill with them, if you weren't careful.
The woman had relied on Rackspace for a lot of custom programming, and then she got the bill, that she realized that her business had reached the point where it made sense to hire her own team of programmers. Like a lot of people who are expanding their business online, she had started out thinking that she only need to make a few small tweaks to her site, and she might as well leave that to Rackspace, since the people there knew what they were doing. But a few small tweaks evolved into much more. So at that point she hired her own team of programmers. Which is how I got involved.
You need to speak with your lawyer, or do a little research.
Therefore, you're fine. The company can't pay. That's called bankruptcy. Creditors are pros too, they should be used to it.
In whose name is the rackspace account? Corporate? Private? Are you incorporated?
Basically what you have to do is to come to an agreement where you contractually agree to pay them an X amount per month + some interest on the outstanding balance.
Make it clear to them that if they go the debt collection route that they will likely get nothing at all but that if they will come to an agreement with you that they have your word (for what that's worth) to make up for the hole.
How did it get this far?
I'm sorry to hear about the credit card fraud, every time someone here says they'll do their own processing I keep hammering on that, so I'll use the occasion to do it once again: Please do not do your own processing, use an IPSP that has very thorough fraud controls and scrubbing in place or you are very likely to get burned.
As for your lawyers fees, it sounds to me like he'll have to give you a discount.
Your co-founder being 'unreachable' is not very nice, in for the good times together, in for the bad times together, let's hope he turns up and will shoulder his part of the problem.
Kudos for not going incommunicado like your co-founder.
Corporate. Incorporated in Delaware. Thank goodness.
I'll try to see if they're good with the payment. I'm just not... like that, though. I'm not one of those guys that can call up Rackspace and be like, hey, if you go into collections, you won't get shit, so we're doing it my way. You know?
Lots of time passed before I came to my senses.
Thank you for your help, Jacques. You know me, and I'm thankful that you're imparting your advice.
Trouble is the time you learn the most, this is also a part of doing business, over the years I've had a few occasions to have to bring 'bad news' (in some cases very bad), you will have to bite the bullet on that one.
> Lots of time passed before I came to my senses.
Hope is sometimes a dangerous thing.
> You know me
Drop me a line, maybe I can do something a bit more concrete.
https://epoch.com/
http://www.ccbill.com/
http://www.vxsbill.com/ (disclaimer, run by friends of mine)
Stay away as far as you can from IBill and e-passporte, jettis has also been going through a rough period.
I hear good things about 'chargify', but I have no idea how well their anti-fraud measures are.
My only problem with processing charges is consumer fraud, the people that actually bought the service that consume it for months and that then suddenly reverse 6 months worth of charges. This happens infrequently enough that it is not a problem. It is also impossible to protect against in an SAAS or subscription situation.
Actual fraud that makes it through is a fat '0'.
Any time a merchant account is closed for cause, such as having too high a chargeback rate, the underwriting bank has a contractual obligation to place the merchant in the TMF (Terminated Merchant File) and MATCH list. Both the company AND the names/SSNs of the principals of the company are listed. This is intended to protect other banks -- so that a company with a history of payment fraud or other problems can't simply go bank to bank as each account is closed.
Being on TMF/MATCH can prevent you from opening a merchant account for future business the rest of your life. Very few banks, almost none in the US, will open a merchant account if any of the owners of the company are listed.
2. most likely, you signed a contract with Rackspace personally right?
3. as for the merchant/credit card account - most require a personal guarantee anyway
So, first of all - I am sure your lawyer will defer or write off a bunch of that bill - happens all the time, especially if you have already paid a number of previous bills.
Rackspace is probably doing what most creditors do - acting as aggressively as possible. If they turn it over to collection, they are already looking at a huge writeoff (collection agencies get a nice percentage of whatever they collect and usually also have authority to write down the debt substantially in offers in compromise). So when push comes to shove, if you offer them a payment plan, I bet they will go for it or at least counter offer. Offer them $1,000 now, and $500 a month for 10 months say - that's full payment of the account. If you feel lucky, offer $3K, $1K now and $500 a month for 4 months.
The credit card account is going to be sticky - because unlike rackspace who made a profit margin on the $6K you owe, the credit card company has probably already refunded the $$ to cardholders that it "paid" to you - the fact that you describe it as "huge" doesn't help - I would assume it may be the majority of all payments advanced to you by the merchant provider. Again, you can probably propose a payment plan which has a good likelihood of being accepted.
Good luck.
There are other factors a judge or jury will weigh as well, but assets are among the most important.
This is pretty common sense if you think about it - although most people (especially those who read the "incorporate for $99 and protect yourself from creditors) don't realize it.. just because you sign some papers and create a legal entity the law isn't going to allow you to stiff people and evade legal obligations.
There are plenty of citations to case law to support this but I am too lazy to go find them to post in this reply.
I will comment though that people are often confused about forming companies to prevent personal liability. If you are the only person on the books for the company, you're still on the hook for everything, whether you've got an LLC, C-Corp, S-Corp, etc.
You might want to find family and friends who can loan you the money without interest.
Can you sell the domain?
Just curious, how did you get so much debt from your lawyer.
Hope it works out and best of luck.
If you are as well known as you say, your reputation might open some doors for you. Some people who like you but assume you're busy doing your thing may be excited to do some work with you that would solve your problem.
Moreover, relationships matter. So if you're a menschy guy, someone whose brother works at Rackspace, for example, might take this through a back channel on your behalf.
Pride is tough. Looking back on the last time I fell on tough times, my biggest mistake was not being more transparent about my situation to people who liked me. I felt weird and silly to be not successful, to have failed, but I ended up making things harder on myself.
edit: it does now.
Besides that, people choose who to work with based on reputation. I'm saying if this person has banked credibility with people over an extended period, he could probably pick up a few gigs from fellow HNers.
At this point, no one knows anything about this person, and so they have no idea what skills or other unique value to ask for or trade cash for.
Besides, you're much more likely to go out on a limb for someone you know is a good guy.
http://lendingclub.com
(downvoting, eh?) Talk to them about a loan.
Write. Nothing will give you catharsis and perspective on this unpleasant experience like writing. Consider sharing your experience with the community; your lessons learned may end up saving someone else from a similar situation, and while learning from a failure is great, teaching from a failure is even better.