Climb Higher

I was walking to a team meeting where I was going to announce that we would likely have to lay off nearly all of our employees because we unexpectedly had almost no money left, and that it was all my fault. On the way, my co-founder and our CTO stopped me and said “I’m resigning. And I’m going to tell the team why.” He then told me that he had lost trust in me as a CEO and as a person. And our third co-founder, a friend of mine for 11 years, was resigning too. Having slept only an hour the night before, I could barely process the news.

I had hit rock bottom.

In The Hard Thing About Hard Things, Ben Horowitz says “nearly every company goes through life-threatening moments… it’s so common that there is an acronym for it, WFIO, which stands for ‘We’re Fucked, It’s Over.’” He estimates that most companies go through at least two, and sometimes over a dozen WFIOs in their lifetime. This was our first WFIO, and it hurt even more because things had been going so well. We’d made incredible progress after founding Amicus three years ago to help nonprofits do what they do better – we graduated from Y Combinator, raised nearly $3.8 million in venture capital, grew to a team of 15, and today can call some of the biggest nonprofits in the country customers and fans of our products. Having survived our first WFIO, we’re as dedicated as ever to fulfilling our mission of empowering people to organize around the causes they care about.

Entrepreneurs often write about what’s going right, but too rarely write about what’s gone wrong. One of the big values of Y Combinator was that we were able to hear strictly off-the-record stories of many successful startups' WFIO moments. It’s a shame more entrepreneurs don’t talk about their most difficult moments publicly, because it paints a distorted picture of what startups are. A lot of the mistakes I made were avoidable, and I hope to shed light on them through this post to help others steer clear of those pitfalls. We have Amicus shirts with “Make Mistakes” emblazoned across the front. They’re meant to encourage people to take risks, be bold, and embrace small failures – after all, if you’re not making mistakes, you’re not reaching your limits. But these are mistakes you shouldn’t make.

Mistake 1: Taxes

I hired our first accountant this year. I knew our books hadn’t been well kept and was pretty sure we owed some state taxes. He determined we owed about $5,000 in state and local taxes, which we quickly paid. But shortly after, he noticed there hadn’t been any payroll tax payments coming out of our bank account.

Impossible, I thought, Bank of America’s payroll system automatically withholds payroll taxes every month, it’s all automated. But it wasn’t. There was a single “submit tax” button in a separate part of the Bank of America website that had to be clicked to actually pay the taxes. And because the IRS had our old company name (“BlueFusion”) and address on file, we never got any notices. 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.

When all is said and done, cleaning up this mess (the taxes, the fines, the legal fees, etc.) cost the company over half a million dollars. And we had to pay the vast majority of that to the IRS immediately. Needless to say, such a huge financial shock severely hurt our runway and triggered many difficult changes. 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, and with this mistake did just the opposite.

Lesson learned:

We should have followed operational best practices, even in the early days. We used Bank of America’s payroll system to try to save costs, but our tax issue could have been prevented by using a third party payroll provider that automatically submitted payroll tax payments. It also would have been solved by proper budgeting. Doing that, we would’ve noticed the tax discrepancy in a matter of months, instead of years, and benefited from the many other upsides of budgeting as well. We also should have worked with an accountant to keep our books in order. Financial operations aren’t my forté. I have little tolerance for paperwork, forms, or bookkeeping, and so had been putting off some operational tasks for too long – knowing this, I should have outsourced this as early as possible. We now make use of a bookkeeper, an accountant, and all payroll taxes are paid automatically. Don’t cut corners here.

Mistake 2: Poorly defined co-founder relationships

The first version of Amicus was built by two incredibly talented developers at Yale who chose to finish their degrees rather than pursue the starup full-time. We recruited a CTO and then a close developer friend of mine joined as employee #2. After some time, I decided to give them each “co-founder” titles, though since we already built a product, raised investment, and had paying customers, our equity split wasn’t even.

We applied to and got accepted into Y Combinator, but after we graduated, the relationships started to cause tension. I often felt like I was pouring more of myself into the company than they were and wasn’t able to share founder burdens, and they often felt I didn’t include them on important decisions and didn’t share enough information with them. One minute, they felt like co-founders; the next, they felt like employees. Confusion and resentment grew and communication suffered.

Lesson learned:

If I communicated earlier with my former co-founders to establish set roles and expectations, a lot of the difficulties we encountered would have been avoided. I should have flushed out a mutual understanding of how decisions would be made, what information would be shared among the founders, and what level of commitment everyone was willing to give. I’d even suggest writing these expectations in a formal agreement.

Just as important are frequent, honest checkins to see how everyone is feeling on an interpersonal level. Founder breakups are one of the most common reasons companies fail. By getting on the same page early on and ensuring good communication, we could have avoided the confusion and resentment that became such a volatile force.

Mistake 3: Not being explicit about hacks

Another area where an honest and upfront discussion is warranted is around what systematic hacks are acceptable and what level of risk everyone is comfortable with. Paul Graham looks for founders who are “naughty,” but what level of rule-breaking is everyone comfortable with? I never had a conversation with my co-founders about this and it ended up causing problems.

In the early days I would often let potential customers think we already had a feature they wanted and, if they signed, would come back to the team and say “we’ve got to build this before they launch!” No harm, no foul, I thought, so long as we knew we were able to build the feature before they started using the product. This is a tactic commonly suggested by lean practitioners. My co-founders, though, would often frown on this behavior, worrying it was unethical, causing a huge amount of tension to grow beneath the surface.

Lesson learned:

I should have had conversations with my co-founders about what rules they were comfortable breaking. Testing product demand with a fake landing page that collects credit card information? Manufacturing a sense of urgency when fundraising? Pushing the limits of the law, which we never did, but which many innovative companies such as Airbnb and Lyft are doing? If we had these conversations early on, we could have avoided culture clashes (and worse) later on.

Mistake 4: Going it alone

Too often while running Amicus it’s been my first tendency to try to solve big problems alone – a tendency many CEOs have. My partner recently offered me some unsolicited psychoanalysis on this point. I grew up without a father in my life, and after an explosion that disabled my mother, our roles were reversed and I became her caretaker at the age of 12. From a young age I’ve been figuring things out on my own, and never learned to lean on the guidance of elders. I’ve developed some bad habits in the process. My go-it-alone attitude contributed to many of the mistakes that have been made.

Lessons learned:

I built an amazing team around me over the last three years, and I should have empowered them more to help solve the big problems and take advantage of the big opportunities. A few smart minds trying to solve a problem is almost always better than one mind. And the more you bring teammates in on problems you’re facing, the more ownership they feel over the organization and the more they trust in your leadership. The same goes for investors and fellow entrepreneurs. Moving forward, I’ll be reaching out to investors, teammates, and my network more frequently when we face problems, and lean on them more when we’re presented with opportunities.

Mistake 5: No outside board members

This is related to the go-it-alone mistake, but it warrants its own mention because I think it’s a mistake I see a lot of first time entrepreneurs making. While it seemed like a fundraising victory at the time, not inviting an investor to sit on our board during our first two rounds of financing was a mistake. While fundraising, I maximized for valuation and control, instead of maximizing for value-add. The worst thing about this is that I raised from some amazing investors who would make excellent board members.

Lesson learned:

The debate about whether a seed stage company should have a founder-only board or a board with an outside investor director is still raging. I know that for me, as a first time founder, the many upsides (mentorship, a cadence to the business, outside perspective, pattern recognition, real investor buy-in) would have outweighed the downsides (loss of control, investment of time in board management).

If I had to do it over again, I would have chosen an investor who was smart, cared about our mission deeply, and with whom I got along very well, and invited them to serve on our board. Had I done this, the tax issue almost certainly would have been avoided, and I’m sure a number of smaller mistakes would have as well. An experienced board member who cares about you and your company can use their pattern recognition to help you steer clear of all sorts of pitfalls. I believe so strongly in this that I’m voluntarily creating a board seat for one of our current investors.

Mistake 6: Poor investor relations

When you’re running a company, there are always 100 things that need to be done, and enough time to do 70 of them. One thing that I let slide was investor updates. There were a couple investors I talked to regularly, but by and large my communiqués were scarce, and normally were sent when I needed something. This meant that when the crisis struck, it took much longer for investors to be able to help than it needed to. I had to fill many of them in on the past year of the company, instead of having to fill them in on the past month. And as you can imagine, having the first substantive update you hear in a while be about an impending crisis is not the most inspiring thing. So while our investors have by and large been quite supportive, it took longer for them to get engaged because they’d been kept out of the loop for so long.

Lesson Learned:

I should have talked with our investors more. I shouldn’t have only pinged them when we needed something, but should have kept them updated on the progress we were making (or not making) on a regular basis. I owe it to my team to keep our investors close and I owe it to our investors to keep them updated – after all, they’re taking a huge financial risk to help us achieve our mission. Aaron Harris of Y Combinator wrote a great guide to investor updates which I find very helpful.

Mistake 7: Telling a half-truth

Lastly, this has been one of the most difficult times of my adult life, and has forced me to go through a painful amount of introspection. Through this process, there was one example of rule bending I wish I could take back. Before Amicus, I was enrolled in the bachelor’s degree program at the Extension School at Harvard University – a small program with a few hundred graduates a year. At the time, I considered it a good hack, as I was getting, as the New York Times put it “Harvard at a fraction of the cost.” I even played for the Harvard Chess Team, including traveling with them twice for competitions in China.

Eventually I dropped out to pursue the startup full time. Partly for convenience and partly to make for a good story, I would often say I dropped out of “Harvard University.” The fact that this was technically true allowed me to rationalize the statement to myself. But in saying it this way, I gave people the impression that I had dropped out of Harvard College (à la Zuckerberg and Gates), which was not the case.

At some point a friend called me out on this, so I started being more clear. It felt good to do so, and the press coverage of Amicus that mentioned I went to the Extension School wasn’t any less compelling for it. But the damage was done, and I often fell back into old habits. To cause people to think I didn’t get a degree from one school at Harvard when, in reality, I didn’t get a degree from a different school at Harvard is the height of absurdity. I’d sacrificed my credibility for little benefit other a sense of false prestige and a sexy line in a press story.

Lesson learned:

First and foremost, 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 honesty. The phrase is borrowed from the excellent book The Transparency Edge (worth a read in full). In the same way a product builds up technical debt with every piece of hacky code, a leader can build up a sort of managerial debt with every fib, embellishment, and exaggeration. They all serve to undermine credibility. And without credibility, you cannot lead. Moving forward, overwhelming honesty is the name of the game at Amicus.

Other mistakes:

Over the three years I’ve been running this company, I’ve made a number of other mistakes as well (burning out myself and my team, on-and-off micro-management, an occasional lack of empathy, bad hires – the list goes on), but the ones highlighted above are what led most directly to the crisis we now face. Each of the other mistakes probably warrants a blog post as well.

This past month I’ve had to part ways with team members I loved working with. We don’t have as many resources as we used to. My co-founders and I shared a passion and a vision for making the world a better place by empowering nonprofits, but now they’re gone and we’ve taken a major step back from accomplishing our goal. Realizing that this is all my fault has been tough to deal with emotionally.

That’s taught me one last lesson: that in tough times a support network is invaluable. They say you only really learn who your friends and supporters are when shit hits the fan, and that’s certainly been my experience. Some of our investors saw these mistakes and threw their hands up in despair – and who could blame them. Others chose to roll their sleeves up and help clean up the mess.

I’m proud of the Amicus team that remains, those who are fighting through the tough times because they believe in our mission. And I’m humbled that they still believe in me. 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. I couldn’t be more grateful for the investors, teammates, and friends that have supported me through this.

Moving forward

It’s been a difficult month. Paul Graham’s essay on How Not To Die has been an open tab in my browser for the last couple weeks. And I now truly empathize with Ben Horowitz when he writes about The Struggle. But we carry on. The mission of Amicus is too important. We’re trying to upend the power structures that exist in society by giving people the tools they need to organize around the causes they care about. We’re not going to let a few bumps in the road – even if they’re big ones – get in the way of that.

I stayed up all night recently reading about some of the great entrepreneurial turnaround stories. It’s shocking how many of the companies we all know and respect were months, weeks, or even hours away from death. FedEx, Evernote, Intuit, Zappos, Airbnb – I’m endlessly inspired by those founders who faced near collapse but simply refused to give up. I hope one day the Amicus story can inspire someone the way these stories inspire me.

To summarize:

1. Pay attention to financial operations from the early days. Make a budget.
2. Be explicit with your co-founders at the get-go about decision-making, distribution of information, and level of commitment. Formalize this in a written agreement.
3. Have conversations with co-founders and teammates when they join about what rules you’re comfortable bending and what hacks you’re comfortable implementing.
4. Don’t be a lone wolf. Lean on the experience and smarts of your teammates, investors, and mentors to help solve the tough problems and take advantage of the opportunities.
5. If you’re a first time entrepreneur, invite an outside director to sit on your board when you raise money. The upsides greatly outweigh the downsides.
6. Keep your investors posted on your progress, be responsive to their requests, and lean on their guidance.
7. Be overwhelmingly honest with your stakeholders (team, investors, customers).
8. Build a support network of fellow entrepreneurs when the times are good, because when the times are tough their support is invaluable.

These are painful mistakes I’ll never make again. I hope by hearing this story you’ll avoid making them too.

Discuss on Hacker News

Thanks:

1. Chris DeMayo did amazing work helping us get our books in order and fixing our tax situation. If you need an accountant, I couldn’t recommend anyone more highly.
2. Ashu Desai, Mattan Griffel, Elizabeth Stark, Henry Xie, Dan Friedman, Joel Califa, Paul Cretu, and Ela Madej for reading drafts of this post
3. The YC network for being so supportive through this

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Seth Bannon Founder & CEO, Amicus. Y Combinator alum. Forbes 30 Under 30 for Social Entrepreneurship. Vegetarian. @sethbannon

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