The 83b Episode

… or me and my six-figure mistake.

3boysblocks1You start a company with a couple of guys and it’s really hard to picture it turning into anything more than an excuse to work together for awhile before you go out and get real jobs.  Sure you start a real company but ‘exits’ happen to other people.  You’ll be happy to build something cool, have some fun and not go broke.

So when we first issued the restricted stock for this particular venture it didn’t feel like a big deal. As always, it was an article of faith that this one, like most startups would amount to nothing. I had to assume that to retain my sanity. It’s easier to tell yourself and everyone else that you’re a psycho who works like a madman because you like it, than to admit that you’re betting a shitload of sweat equity on a super long-shot.

No surprise then, that when it was time to file the 83b election form I prioritized it appropriately. The 83b election is the IRS form you file to get any appreciation on the stock treated as capital gains rather than personal income.  And when I say appropriately, I mean I put it at the bottom of the task pile, below laundry and beard trimming.  The problem with that approach to the 83b is that you have 30 days from receipt of stock to file it or it doesn’t work.  So one day I was driving along and realized that the 83b was laying on the passenger seat next to me, unfiled, and it’d been a lonnnnngggggg time since I’d signed it. An icy chill shot through me. I stopped at the nearest post office and, without actually doing the calendar math, fired it off to the feds (and the state?!), return receipt requested.

Fast forward several years and lo and behold, we’ve done something right and someone wants to buy the company. Suddenly the 83b takes on incredible significance. If I did it right, I pay 15% capital gains on the money. If I screwed it up, I pay 35% personal income tax on it. A difference of 20% – or as we used to say back in Inman Square, six fucking figures.

Now I’m not the most organized guy in the world.  If it’s not in source control  or my pants pocket (what has it got in its pocketses?), I have no idea where it might be.  And the company was not the most organized operation so the paperwork I had was crappy and scattered all over the place. But what I HAD retained in a nice neat little box in my brain was that spear of icy fear that I’d screwed it up – I’d missed the deadline. I was convinced of it.

Worse, I would have to turn the house upside down to find the paperwork and all that effort would merely prove that I was an idiot. And having realized this in the middle of the week, there was nothing I could do about it until I had the time to go through every piece of paper in my office.  A sloppy mistake I made years ago cost the family six figures. We didn’t have six figures to give away.

Mrs Pointy-Hair found me sitting at the kitchen table that first day. I told her I was worried. Mrs. PH and I have been together for a long time, through our share of ups and downs, and that’s the first time I ever said that to her. I’m not a worrier.

That Saturday I sat for seven hours sorting through 10 years of tax returns and every loose piece of paper in my office. The 83b showed up right after lunch, dated September 21st. Then a few hours later, a return receipt signed by the nice man at the IRS office. October 19th. 28 days. Sloppiness had nearly cost me six figures.  I’d done a shit job getting the 83b in on time, and I’d paid no attention to the return receipt, just threw it in a file and forgot it.  How close I skated to the edge of that abyss is appalling.

But you don’t come here just to see me confess the occasional sin and shred startup CEOs and glibertarian developers.  Come for the entertainment, but stay for the education.  So without further ado, the several lessons to be drawn from this sordid episode:

  • Memory sucks, mine more than most. I can draw up the network map of a data center I haven’t seen in ten years but I remembered the formation of the company, the transfer of stock and much of the action at the company wrong – completely wrong.  In one case, I was looking in the wrong boxes because my recollection of an event was off by two years.  As I sifted through the paperwork it was clear that stuff I thought had happened one way really hadn’t.  It was like reading about someone else’s life.
  • Being generally correct is better than precisely incorrect, but being precisely correct is even better. Who knows, if I’d prioritized 83b ahead of something else that might have started a chain reaction and we might have missed a contract milestone and lost the business right off the bat.   Right.  Measured precisely, it was still higher priority.  And if I’d read up on 83b at the time I would have filed away the “nailed it” feeling when the return receipts showed up.
  • Here’s one for the ladies: Don’t marry a guy who makes up convoluted rationalizations for not sweating the details.
  • Sloppiness kills.  If I’d had one more layer of crappe on top of it on the passenger seat, I wouldn’t have seen the 83b in time.  If I hadn’t been driving by a post office (those things are EVERYWHERE!) I might have put it off again.
  • Whatever it is, do it now.  Really, how fucking hard is it to go to the post office?

Choose Wisely

choosewiselyThe most important lesson of all though is choose wisely – in this case choosing your partner.  That came with Mrs. Pointy Hair’s reaction to the (incorrect) news that I’d pissed away a house or two by not going to the post office on time.  She listened patiently to my confession and simply said:

Well, it’s still a lot of money.

And she was right. Capital gain or personal income, it WAS a lot of money. And I love her for realizing that when it mattered, not years later when it wouldn’t.

The Harry Project or Yet Another Modest Proposal

bouncingtherubbleThere’s a saying from a long-forgotten war, The Cold War, that goes something like

of the 30,000 nukes available to the two sides, in any war the last 29,900 of them would merely be bouncing the rubble of a dead civilization

When I hear about the competition for developers, especially the salary, that’s what comes to mind.  Now I’m speaking from an entirely Boston perspective so if you’re in SF you might as well look away now.  But it’s my sense that provably good mid-career devs are getting salary, bonus and liquid option packages in the 150 range.  That’s a broad statement, but I suspect that if I’m not spot-on it’s plus or minus 10k on either side.

Whether or not the number is right, it seems to me that 150 is bouncing the rubble.  It’s absolutely the case that all the good devs I know or have known don’t view money the way business guys or sales guys do.  A business guy knows that 150 is 10 more than 140 and thus 10 more attractive.  End of story.  For devs, compensation is a step function.  There’s enough, and not-enough.  That’s the way it’s always been for me.  I’ve taken a discount to market most of the time to work where I wanted.   Prospective employers can just pretend they didn’t hear that.

For those who learn through pictures, here’s how it looks:

MoneyHappinessBusiness MoneyHappinessDevs

Note that there is no “enough” on the business guy scale.  It’s my contention that today, in Boston, we’re well into the area between enough and lots.

I Call Bullshit

So you can get most devs for 2/3 of market if you’re doing something fun.   And all startups are fun.  So why aren’t devs flocking to found new ventures and taking a fairly safe but fun ride through startup land at a salary == enough?  Because that 2/3 of market doesn’t kick in until you have money, and the money chase rests on a big fat foundation of bullshit.  Specifically, this hoary old truism:

you don’t deserve funding until you prove that you can get a technical cofounder to work with you for nothing

Now there’s just a little bit of logic in that.  This being that a CEO has to be a good recruiter, has to have a vision and personality that makes people take risks just to join him.   But that’s where the sense in this ends.  Just as a simple for-instance, your CEO who does show up with technical cofounder in hand could have made any kind of jackass promise to this guy and you’ll never know it until the whole thing blows up in “founder issues” six months after you’ve given them money.  Or, as another simple for-instance, your CEO may recruit a guy from the pool of people willing to work for nothing – i.e. the guys who can’t get anything done.  Again, you find out six months after you’ve given him money when your V1 is just a pile of TODO comments.

CEOs with vision and charisma are thrashing around trying without any help to learn a skill that they will never use again – how to recruit and vet a technical cofounder.  Think about it, if the venture goes somewhere, they will get seed, and they’ll use that seed money to get people for 2/3 market.  In fact, they’ll start paying their tech cofounder 2/3 of market.  The skill of “getting a high-paid technical guy to leave his job and come work for you for nothing” will NEVER come into play again.
And I have the networking scars to prove this. Over the last six months I’ve talked to dozens of business founders desperately seeking technical cofounders. Many of them are serious people with good ideas that mostly don’t require new science, just solid execution of known science. But their window is closing while they spend day after day trying to convince the wrong people to leave overpaid jobs at Google to come work for nothing.
Thus, I posit the following:

The startup world is losing viable ventures simply because the founder can’t turn water into wine.

The Harry Project

harryIn The Great Escape (the real one) a tunnel code-named Harry allowed 70 POWs to escape.  Well, think of The Harry Project as a tunnel allowing devs trapped in corporate limbo to escape to startup land.  How would it work?

The Harry Project is a company that builds stuff, specifically MVPs and prototypes.  So far so good, not all that different from what some consultancies do on the side already.  Here’s the difference between Harry and everyone else:

  • Harry’s mission is to graduate projects from concept to fundable prototype or MVP
  • Harry takes a cut of the action, specifically the equity difference between what a pre-money technical cofounder gets and what a post-money technical cofounder gets.  Or it can take a mix of equity and cash, but never straight cash.
  • Harry takes projects it believes in, not the ones it can wring the most cash out of.
  • Each of Harry’s devs is expected to follow a project out the door as technical cofounder.
  • Employment is an up or out proposition.  Within two years you’ve either left as a technical cofounder, or gone back to corporate life.
  • Harry trains technical cofounders.  Its processes are relatively rigid, current best practice meant to make its devs good technical cofounders.
  • Harry’s devs all get the same salary, somewhere around 2/3 market.
  • Harry shows business founders how to work with devs and vets technical cofounders they might want to bring in from the outside.

An organization that’s part recruiter, part angel, part consultancy, part code academy that gets concepts off the ground and ready for angel or VC funding if it chooses to go that route. For devs, it’s an escape route when you’ve been to one-too-many meetings, a way to take a chance without bankrupting your family and risking homelessness. For business guys it’s a way to get to MVP and vet a technical cofounder without marrying him. For the right consortium of seed stage players it’s a no brainer. After all what’s the worst that could happen?

Update 1: Having read this over it’s clear that this was 3 blog posts in 1.  3X the bloggy goodness for  you, 3 wrist slaps for me for spending all my social networking capital in once place.