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Quite disagree. Early mistakes cost me a lot of heartache later on. But you don't have to figure anything out by yourself. People like us get hired because we're experts in software development; we can absorb requirements, understand the business, and apply technology to get an optimal outcome. There are professionals in the accounting and legal fields who specialize in things we don't have experience in and they are worth it.
Even just for personal life, having a little knowledge of law and tax is really helpful and helps not getting screwed by various actors (companies, landlords). Then yes, once the requirements are bigger and more money is involved, delegating is a good idea.
We optimized tax structures in a way that was very technical and awesome — until one of our founders lost the plot, accused everyone of fraud, went to our investors, and blew up the company.
After the fallout cleared it turned out we, the other founders, had done nothing wrong. Not even non-standard, just advanced. But now the lawyers had all the money and the company failed.
Perhaps it would have been more efficient to not optimize taxes and instead optimize founder alignment.
Keep the parts of the business that are not directly on the critical path to success completely normal and standard.
A bit of a shame, though, because the status quo has lots wrong with it, and it can be impractically expensive to change things around eg equity structure later.
You can also optimize your company structure to be more resilient to founder disagreements. Unfortunately, the legal system and the cost of attorneys can be a hard thing to optimize against.
Tell us more about the structure. Maybe can help someone reading.
Thanks for the offer. I’m legally bound from talking about this.
Except, it’s time to normalize not doing a Delaware corporation to raise capital. Plenty of other choices and many are better suited for the modern world than Delaware.
One lesson YC taught founders back in 2012: innovate within your product. Don’t innovate with things like HR, legal, corporate structures, etc. Focus your innovative energy where it matters: your product.
Startups don’t fail because they chose to not innovate when setting up their corporate structure. They fail when they can’t build a product worth money to other people.
Having an innovative or non-standard corporate structure (basically anything other than Delaware c-corp) will cause headaches and even once you’re successful, will make a lot of things more difficult. Harder (more expensive) to find lawyers, harder (more expensive) to find accountants, and it will be an issue if you are getting acquired or raising money.
I don’t disagree there might be viable alternatives. But most founders shouldn’t be trailblazing a new path with an innovative corporate set up. Just do what everyone else does and put your focus where it matters.
I’m curious why anyone wouldn’t default to Delaware c-corp for the typical startup raising capital. What’s the gain?
Such as?
Best I could tell Delaware is still best state to incorporate. I’m extremely interested in contrary opinions and their basis.
> Except, it’s time to normalize not doing a Delaware corporation to raise capital.
Is that really common for people to do in EMEA? I thought that was a US thingy they teach you at startup schools/incubators. AFAIK, EMEA founders setup their company in their respective countries.
curious roughly what was your structure?
Can’t answer for legal reasons.
I suggest there is value in optimizing your own personal tax structure, though. In many countries, setting up a family trust to own your company shares provides enormous upside if you have a large exit, because your family members - including children, spouses, and even distant relatives - can all make use of their personal capital gains exemptions to shelter more of the gain from tax. Nearly everyone I know with a mature tech company has made this move and many people I know who have exited have thanked the lord they did it.
Your mileage will vary depending on jurisdiction and governments in many jurisdictions have been making changes to tax law to reduce the use of trusts in this manner. But the advantage still remains in many places.
I was not able to retire until I set up a income mechanism that minimize taxes. When they call it an obsession, but taxes are a huge effect on received income and so incredibly important in many jurisdictions...
"Do not obsess over tax and legal until you are at least marginally successful" is a perfectly reasonable approach for a traditional US startup that borrows (usually more than once) to build the product, get users and eventually reach the profitability. In this mode, startups are most likely to fail by not building the product that can be monetized and grown to profitability. This is what they should focus on. Once a company is profitable, early missteps in tax and legal can be corrected with money, and usually not that much money.
But for anyone building a lifestyle business, starting with a wrong legal or tax framework is much more likely to be a major pain and potentially doom the business altogether. My 2c.
Starting with the wrong legal or tax framework doesn't mean you have to continue with the wrong legal or tax framework. When the question becomes important you can migrate.
Do not obsess, do not wait too long or at least spend some time on taxes anyway. I needlessly paid so much tax in my life because I reconned we would figure it out when the company gets proper revenues. Whatever that means. Others that I know who started at the same time immediately optimized at their first 10k income. They did vastly better than me in profit (at the time; they showed me how to fix it). No need to obsess to make sure you are not getting shafted left and right.
> No need to obsess to make sure you are not getting shafted left and right.
This is a fantastic point. People tend to check-out and glaze over when they have to deal with accounting and tax matters, and that's a really efficient way to variably either run your business into the ground, artificially hamper it, or screw yourself later.
When my colleagues and I opened our business we had a few concise discussions on corporate structure. We went with a C Corporation because at the time we all had major financial changes on the horizon in our personal lives and we didn't want our personal and business taxes to be interrelated.
Still works for us to this day, and was a wise choice give our respective personal tax situations.
Likewise, early advice I'd give anyone is to invest in an accounting solution that fits your business model.
The law of diminishing returns[0] implies your first moves are also your highest ROI. “Make sure you’re not getting shafted.” is a good rule of thumb for a lot of things.
For most US tech startups, it's basically Delaware C Corp, figure out your 83b / QSBS / SAFE, and later, R&D Tax Credit. If profitable early, and not spending back 100% on growth, add in some treasury management setup. The rest should be growing the pie and not going out of business.
Part of that is saving you time by getting a book keeper and accountant who will walk you through minor additions to this stuff. I see folks spend time on weirder ideas like Trusts, and they are time sucks away from what they should be doing, and if/when M&A hits, a lot of nonsense to unwind. I rather spend that time getting an extra $50k-$100k customer that raises the valuation $500k-$1M.
The one shift I've seen is QSBS hijinks at state levels have led to founders leaving SF/NYC/etc as their co's hit Series B+ and and they care less about local VC + tech ecosystem proximity. Less true of unprofitable companies reliant on the next round for keeping the lights on.
I think this depends wildly on which jurisdiction you’re in. It’s pretty easy in the UK to just use FreeAgent or Xero to handle accounts and you can get to grips with the basics by just googling around.
In the U.S., it’s fairly easy too if you use quickbooks or similar, but the IRS is much harder to deal with than HMRC, and is much more of a punitive organisation.
However, having an accountant to talk to can give reassurance that you’re not going about things extremely stupidly.
The moment you start doing business in multiple jurisdictions (in the U.S., this includes multiple states), it starts to get a lot more complicated and using a professional makes sense. International tax is a huge pain, especially where the U.S. is involved.
I do think the general idea that it’s much better to try and run a straightforward business without complicated tax structures when you’re young really rings true. It’s better to focus on generating revenue than trying to squeeze out every penny of tax optimisation.
I'm a solo dev, but have an accountant (remote) almost for the sole purpose of making me sleep a little bit better at night. I still have to gather all the receipts etc. info for them, but it's great to worry a little less.
The accountant itself is also a deductable expense.
I'm curious, for various locations and business scenarios, what the optimal choice is for getting paid help for your taxes.
E.g., when is a simple accountant worthwhile? How about one specializing in business taxes? When (if at all) should you switch to a full blown accounting firm? When should you hire a CFO to optimize these choices for you?
These all cost money, so I assume there's some break-even point on the investment. And other pros/cons for a company owner delegating this part of the business.
If your startup has a chance at an exit in the >$5M range, then you should definitely have a personal accountant analyze your situation. Capital gains taxes start to crush your dreams when you are into that realm, and structuring things more intelligently can save you millions of dollars. In terms of income, I think anything below $400K or so can be handled without an accountant. Above that level, use an accountant simply to provide a backstop in case you get audited, because you’re now in the realm where the tax authorities can make some real money by finding things you did incorrectly.
> I am not an accountant or a lawyer and you shouldn’t take advice from random strangers on the internet,
Useless article. Get an accountant they are better than you at this.
Obsessing over taxes is understandable given their complexity and potential consequences. Till you figure it out
> it’s totally ok to stumble blindly through this stuff at first until you’re making significant dough.
I would rephrase that as “don’t rush to create a new legal entity until there’s an event that forces you to.” Events such as:
- raising money from outside investors - forming a partnership - hiring an employee - so profitable that the plaintiffs/lawyers are circling
Forming a new legal entity takes time and money and distracts from getting the business off the ground. If the business doesn’t get off the ground it’s time and money to close down the entity.
(Someone will respond to this by declaring that you need limited liability protection for your personal assets, which is a level of paranoia I don’t subscribe to mainly because your personal assets are already at risk even before you start a company. Sane people/customers aren’t hunting for lawsuits, they have lives to live and businesses to run.)
This is an odd article.
I’ve been a founder and know dozens of founders. Tax has never come up as a topic of conversation.
Primarily because companies are only taxed on profits. Most startups aren’t profitable and therefore pay no taxes (other than payroll taxes).
This is true even for public companies. 40%+ of S&P 500 companies are unprofitable.
They are often “unprofitable” exactly because they properly optimized their taxes.
At the extreme, no Hollywood production ever makes a profit, and they aren’t taxed. The tax people aren’t stupid, and the total tax paid is actually reasonable, but it is not paid by the entity that makes the movie, but rather by actors, marketing, filmmakers, etc. They get to minimize their tax to the absolute legal minimum, while at the same time advance their business goals (primarily, shaft whoever isn’t aware of these schemes - mostly newcomers to the business)
Roughly speaking, my experience tells me the percentage of founders (or aspiring founders) who obsess about such things is <10% and highly correlated with their proximity to MBAs.
Folks building products to solve problems for people are far more likely to do what they’re told is “normal/best practice”. At the other end of the spectrum 10% who do nothing and expect it to be “fine”.
That reads a bit cynical, but it isn’t intended to be — people choose different paths and how and if they work out is hugely varied. Each path has benefits and risks, and appeal and ugliness.
S&P 500 actually requires the sum of a company's earnings in the previous four quarters must be positive in order to be considered for inclusion.
Of course the profit reported to investors could be different from the profit reported to the IRS.
This is very well thought out advice. That said you do need to be focused on the right areas of tax code, and understand that some things can be changed later and some things cannot (at least, not easily or without significant expense).
For example, I relocated to Puerto Rico several years ago and am taking advantage of a 50% transferrable R&D tax credit. Because it's transferrable I can sell the tax credit to people that have a tax liability even if I don't.
After fees, this means I get roughly 40% cash back on my R&D expense. This is a big deal to me and my company.
If you don't do your home work you can potentially miss out on some great opportunities. That said, you do still need to build a good business, or the best tax structure in the world won't save you.
In EU choices like your jurisdiction, company structure and place you conduct business from will make a huge difference. I think it's the most important thing you should worry about. You can end up working for 25 years in Germany just to end up with the same amount of money as someone who worked 15 years in Poland running the very same business and that's not including cost of living and bureaucracy costs. If you need to hire people the difference is going to be even bigger.
Taxes are very real cost. They mean years of your working life, risks you could take, choice you can make, life quality you can afford, close ones you could help etc.
I think in general it's easy to get distracted by optimization instead of focusing on the highest-leverage decisions. Tax and legal structure is a good example. It doesn't matter how good your tax situation is if you have no path to success as a business.
There has to be some middle ground between obsession and not caring. This article seems to advocate for not caring which is wrong.
(a Philippine one-person corporation owner here)
My experience with tax optimization is that, after the first year, the auditor included suboptimal tax settings as an audit finding and also provided concrete recommendations on how to implement the change. So, really, don't think about it, you will get the advice anyway.
in English - "suboptimal tax settings" means "not optimal" or more generally .. "not good" .. second, "settings" are usually associated with a machine or software, not a business deal..
here in the USA it is the opposite.. the IRS will never tell you a better way to do anything.. and in common case will try to charge you more tax and not tell you how to improve your structure
I read auditor as not the tax authority, but an auditor or accountant hired by the company.
> he IRS will never tell you a better way to do anything
The IRS does not have knowledge of everything you do. They can figure out shit that makes no goddamn sense on your taxes, but they won't bother to optimize stuff FOR you.
Why do people complain that the government doesn't have omnipotent knowledge of your finances? Why do they also complain that the government won't spend tax dollars doing shit for you?
You're unlikely to go to jail right out of the gate, but there can be some very expensive lessons. Like almost everything outside of your primary focus the first ~80% comes pretty easy with a little effort - that's when you should stop optimizing and either ignore or hire.
I would reframe this to be if its your first time, don’t obsess
But if you’re already familiar with how to optimize, implement that obsessively
>"Software engineers like optimizing things. It’s easy to nerd snipe them with something that looks like a well defined optimization problem with a few variables and is actually a big complicated mess of badly defined and contradictory almost-facts."
"almost-facts".
I did a Google search for this term and I didn't find many results, and none of them seemed to be using this combination of two words as its own term...
In other words, the author of this article -- may have coined a catchy new two-word phrase here...
"Almost-facts".
As a phrase, I love it!
That term is going into my 2024 lexicon! :-)
It might find some application alongside such recent terms as "Fake News"...
For example, to use this new term in a sentence:
"The Fake News reports Almost-Facts..."
:-)
Anyway, interesting article!
Facts, this is one level above obsessing over the look of the website :)
We also did this :(
Hire a tax lawyer. The amount they will save you in taxes is much higher than the amount you're going to pay them.
A tax accountant, depending on problem and jurisdiction, is MUCH more cost effective than a tax lawyer, by an order of magnitude.
An accountant isn't going to give you the same caliber of advice a tax lawyer can. As for the cost, what part of "The amount they will save you in taxes is much higher than the amount you're going to pay them" do you not understand?
Maybe this is the disconnect: you use a tax lawyer to set up your legal entities to minimize the tax you need to pay. An accountant files your taxes every year. I'm not advocating you pay a tax lawyer to do your taxes every year. That would indeed be overkill and expensive.
Eh it’s worth at least hiring an accountant to handle the taxes though. It’s not expensive.