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Comment by michaelbuckbee | Hacker News Reader

This post is describing a structural issue on the funding side of new ventures: -

- bootstrapping is very hard

- traditional credit/loans aren't structured well for the "mid" type risks of starting software businesses (not much collateral)

- and on the VC side there is much less opportunity for the Unicorn 1 in 10 exits.

Tackling this problem are two funds that I didn't see mentioned in either the article or the comments so far: TinySeed and Calm Fund.

https://tinyseed.com/thesis

https://calmfund.com/shared-earnings-agreement

Broadly both invest much less than a traditional VC would and are compensated differently. The details are different (and matter) between the two but it's more along the lines of profit sharing than looking for big exits.

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Tracy here from TinySeed, thanks for linking to our thesis!

Point of clarification: we don't do profit-sharing. Instead, we are equity owners. So when a company gets to the point of success where they want to take money off the table, they can issue dividends (and TinySeed get's a pro-rata amount of those dividends). I find this is one of our most unique points and aligns the incentives of the founder with TinySeed.

As mentioned in that page, by investing broadly into B2B SaaS, we can succeed as a venture firm without needing to count on unicorn exits. We're about to back our 80th company, and our founders tend to be older, more likely to have families, and tend to be "unsexy" businesses. We're only a few years old, but we've had very promising results (as a VC firm) so far.

You should add that you cap founder salaries at $250-$300k/year (if I remember your terms correctly)

If you’re a founder looking at TinySeed, what this means is that if your business reaches a level of success you can pay yourself over $250k-$300k through your W-2, you’ll either have to cap it there or pay the rest through dividends.

That said, this isn’t really a terrible setup if you plan to go down this route. The IRS takes issue when tightly held C-corps pay themselves large amounts via W-2’s because they would want to reclassify those as dividends. They won’t say what the “large amount” is, but I’ve been advised that its around $250k-$300k if you don’t have disinterested stockholders or board members voting on your comp.

As always, consulting with your accountant before making tax and/or fundraising decisions.

> IRS takes issue when tightly held C-corps pay themselves large amounts via W-2’s because they would want to reclassify those as dividends

Isn’t dividend income taxed less than W-2 income?

Yes and no. It depends on what bracket you’re at on your income tax. It also depends on whether or not you’re factoring in corporate income tax too, which is paid before dividend distributions are made. For tightly held C-corps, you’d probably factor in the corp income tax since the concern would be about tax efficiency from revenue to dollars in your pocket.

That's correct. More info here on the full TinySeed terms can be found here: https://tinyseed.com/faq

Salaries and benefits need to be capped, otherwise founders can choose to pay themselves instead of paying dividends.

Honest founders often love the status that comes with big salaries and expensive perks, so investors need some way to cap that behaviour or otherwise investors get shafted.

It is perfectly fair: dividends do not overly cause taxation imbalance.

Micro-optimising for success before you are successful is a loser’s game. It is, of course, critical to configure your business so that you do indeed reap your rewards if you are successful (watch out for VC’s who have asymmetric information about the end-game and they can optimise for that against you).

If you are successful, then don’t sweat the micro-optimisations you missed out on. When founding, it is often easier to make the business 5% more profitable, rather than lose time pre-optimising for potential 5% gains.

bradgessler, you have that completely backwards (might want to edit your post so others don't get confused). Dividend income is almost always taxed lower than w-2 income on several levels. The IRS goes after C corps for distributing dividends without a fair-wage w-2-- it triggers an automatic inquiry which, if you're not paying a fair wage, leads to an audit.

On the thesis page it makes it sound like only B2B are considered, but here you stated primarily. Is this just a mis-wording here, or is it more that the focus is B2B but you won't outright deny a B2C company, if you think they have a good idea?

> the focus is B2B but you won't outright deny a B2C company, if you think they have a good idea?

Correct — also, most B2C companies have, or will build, a B2B component due to the higher contract prices they allow.

I really appreciate these suggestions. We're a fully bootstrapped ~20 person, $5M+ ARR company in the DevOps space. We're growing quickly and often wonder what an extra $1.5 - $3M could mean for us, but don't want the overhead associated with a traditional investor, nor to invest the time in raising. We get emails from 3 - 4 VCs per week, but never any alternative funding options like the ones you listed. CalmFund in particular could be worth exploring. I wish this space ("Tech Mittelstands"?) were better established.

You might be interested in TinySeed's Syndicate offering — we started this for companies who are beyond the needs of the accelerator but would benefit from raising money (for instance, to deploy on new initiatives, or to take money off the table as a founder, or to buy another business, etc.): https://tinyseed.com/syndicate-founders

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