Ask HN: I'm owed 8k by a startup that's going under. What do I do? | Hacker News Reader

Ask HN: I'm owed 8k by a startup that's going under. What do I do?

I contracted (development work) for a YC startup for over a year. About a month ago, they went radio silent after I decided to end my contract with them and pursue other work. I'm now owed about $8,000 for my final two invoices (which apparently was "on the way" via ACH and must have been retroactively cancelled once I told them those would be my final invoices).

They are not answering my calls or emails. I still have access to all of their code and deployment environments (which I have not touched), and they haven't worked with anyone else since my departure. I believe they're going under.

What are my options? Unfortunately, I am in NYC and they're in SF, and our contract provides for all disagreements to be settled in SF court.

Throwaway account because disparagement, NDA and all that.

EDIT: For everyone that thinks I have ideas about doing something malicious to their site, of course I'm not stupid enough to do that. I mentioned the access to code to show how I'm sure they're going under (I know they haven't had any active development since I left).

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Take a deep, deep breath, then stand and look at some water until you've made peace with the fact that you'll never see that money.

It's worth noting that you can insure yourself for unpaid invoices, at which point should this situation occur again, you tell the insurer, they pay you, and they will then do all the nasty legal stuff they need to to cover their loss - and you don't have to worry about it.

Not much help for this time around, but if you're working with fly-by-night outfits, it's a must.

Above all, don't do anything malicious, as you could then find yourself on the end of a criminal CFAA case, which would probably mean years in jail.

> Not much help for this time around, but if you're working with fly-by-night outfits, it's a must.

Yeah, I guess in our community we don't think of funded startups as "fly-by-night" outfits, even though any bank or mainstream institution would absolutely think of them as such. I guess I had a little more confidence in the kind of person that has convinced well-known investors to give them money.

FWIW I've had other founders treat me very well in going-under situations, so I know it's not everybody.

Totally, but even nice, well-intentioned people may find themselves in a situation where they're utterly unable to pay. If anything, that can be a harder situation if you're trying to deal with it personally, because going in guns blazing "fuck you, pay me" with someone you like isn't easy.

Have been running an agency for the better part of a decade, we've grown from two to thirty-something people, and while we started with no insurance whatsoever, we now have policies coming out of the wazoo - and it's a double positive, as:

a) We no longer have to deal with "bullshit" situations. More often than not we notify the insurer and let them deal with it according to our wishes.

b) Because of (a), we can deflect most relationship damage that goes along with "bullshit", as it's not us being the aggressive assholes demanding payment, it's our insurers.

We spend maybe £10k a year all-in on insurance, but with several £M of turnover and several £Bn of client revenue (i.e. revenue they take through their sites) in the mix, it's an absolute bargain. We've only had to make two claims - most of the time, they make situations go away (negotiated settlement, etc.) before we have to make a claim, as it's in their interest (cheaper resolution) to do so.

Tell me more about this all-in insurance. Where would you find these types of insurance companies. I run a small digital studio and run into similar problems from time to time with startups - it's always startups.

Our policies are mostly with Hiscox, brokered by Willis. Honestly, talk to a broker, you'd be amazed at what you can insure.

Can you actually insure receivables in practice, or is this just something we've all heard about but never actually done?

My experience with receivables over my consulting career leads me to believe that any insurance you could actually acquire for them would come at a stupendously high premium.

I've never heard of invoice insurance but so called 'factoring' is a thing. Where you sell an invoice for cash now at a discount to it's face value to an investor. It achieves the same result of offloading any risk of non-payment to a third party.

https://en.wikipedia.org/wiki/Factoring_(finance)

Right, but I was under the impression most factoring arrangements were with companies that actually sold things.

I'm not sure I see how factoring, discounting, or insuring of consulting invoices could even work. It can take 6 months to get a client to the point where they recognize a payable, and at that point they still often dispute or delay over acceptance criteria.

How could a financing company possibly assume those kinds of receivables?

If there's an invoice for a non-trivial sum and a legally enforceable claim, there's a price at which someone will be willing to buy the invoice, even if that's pennies on the dollar.

Obviously your invoices are discounted by less if you have proof of shipped goods, the client is a blue chip with a history of prompt past payment and the invoices aren't overdue yet. But consulting assignments with signed contracts and agreed invoicing schedules are fair game.

I'd be interested in hearing from anyone who has ever done this with a consulting receivable, where the person they sold the receivable to wasn't a friend or colleague or something.

There's certainly no shortage of companies advertising it as a service, and I'm pretty sure my friend's pretty standard micro web agency has used them before. I certainly doubt Matsano would have had much problem factoring their invoices had it made financial sense to do so

Randomly-selected examples: http://www.fastarfunding.com/internet-consulting-factoring/ http://www.comcapfactoring.com/blog/factoring-financing-for-... http://www.factoring-invoices.com/consulting/

I'd be interested in hearing from anyone who has used any of these services.

Of course, they're not super relevant to this thread: factoring companies assess the creditworthiness of clients. Most startups have no credit.

How is this any different to selling a debt?

"selling a debt" usually means that it is being sold after the payment is already delinquent. Factoring takes place before there is ever a hit of trouble with payment.

Too much work to do real flowchart in ascii, alternative version:

  Are they incorporated? 
   -> No: sue founders personally
   -> Yes:
      -> Will they go under in < 6 months?
        -> Yes: your money is lost
        -> No:
          -> Do they have assets?
            -> No: Your money is lost
            -> Yes: sue asap

Alternative: some companies buy debt at a discount. Some collections agencies do it, since they're in the business of chasing debtors already anyway. Not sure in US who would do that.

Do not do anything to website or whatever else you still have access to.

Those are pretty much your options. You seem to have some ideas of yourself (judging from you mentioning 'YC', 'access to code', etc.). Those are all bad, ineffective, stupid - or all three courses of action.

I think the reason "access to code" and whatnot are mentioned is that it would be indicative that he wasn't fired but not told he was fired. If your client stops communicating all of a sudden it's often the case that you're not hired anymore and nobody there wants to tell you because that's never good news. And ultimately not telling someone and not paying them and not returning their calls will eventually let them figure out that they're fired. But in that case you'd definitely lose any kind of access that you once had. Passwords would be changed, your git privileges would be revoked, etc.

Prior to assuming that this person wants to blackmail them, think perhaps if there might be another reason it's mentioned.

I actually included it to show how I'm pretty positive they're going under and have no assets remaining. Added an EDIT to my original post.

I can imagine they went silent because it's an awkward issue and they are trying to avoid it. I know I am more likely to respond to the problem emails I can solve quickly than those that are more difficult.

Maybe its time to level up and try using a collections agency like: http://www.olddebts.com/

Whenever a client seems to be giving me the run around I pay for a simple `Instant Collect` + `Credit Bureau Reporting` (should be around $10-$15) and its amazing how the threat of destroying someones credit can change the scenario ;)

I actually used this strategy to effectively get paid back from a law firm! No lawyer needed.

It might just put you at the top of the list of people to repay.

Not vouching for olddebts here, though I am happy with their service. There are other options.

Definitely don't give up on ANY amount of money.

Comcast's automatic billing system overcharged me by a dollar when I canceled. (I moved to a town without Comcast.)

Yes, I gave up on the money even though they sent me monthly reminders that they owed me a dollar. Not worth sitting on the phone...

Comcast eventually sent me a check.

Charge more. Your rates need to have credit risk built into them. Unless I miss my guess, they don't, and they're at a discount to market to boot.

How are you sourcing "They're going under"? If it is true, you won't be able to collect -- if the bank account is bare then it is bare, and there is no reason to expect the founders to backstop this invoice for you.

If you're simply being fobbed off, then the usual escalation options are a) restate demand for immediate payment via certified mail and b) lawyer sends them a nastygram.

But either way, charge more.

I second "raise your rates". I'm 90% sure you are significantly undercharging because a) you live in NYC b) you are getting work for SF companies, and one that's YC c) you care a lot about a $8,000 debt.

Double your existing rate immediately and don't look back!

For reference, I'd kick myself for undercharging if I billed that much for a week, and correspondingly consider it "annoying but not business-critical" if I had trouble collecting it. Charge more.

Your rates should not be pinned to a lowball bid for an annual salary for a newly minted CS student. You're assuming far more risk, and hang around just long enough to deliver major value and get out, rather than being just productive enough that it's not worthwhile to hire someone to replace you.

You need to operate like a business that is delivering a high-value service in exchange for a reasonable fee. And you should probably narrow down your offering & marketing to the point that you have very few direct competitors, and practically none once you account for location and availability.

If you are individual to corp 1099 contractor, let the YC startup know that if you are not paid within certain time, you will be filing a report to State Dept. of Labor and State Attorney General. Labor claims get much higher priority during liquidation. The $8K might be too high for small claims court other wise a lien through court judgement is very effective.

Don't just walk away thinking it was cost of doing business and cost of your "stupidity". Such actions just enable people and companies like these to exploit others. As it is a YC startup and in SF, when you talk to anyone (offline) in SF area, just sneak in the mention how you were wronged by YC startup and founders. SF startup community is connected and words get around. Reputation is important.

As a lesson for the next time, don't ever work for anyone on contract without taking advance payment and/or have more than one pending invoice.

I work in financial data analysis and I use a saying. Never ever give someone benefit of doubt in discussions or business transaction or believe someone because of their background, pedigree, and how well known they are. If you do, there is a Madoff and LTCM waiting around the corner to clean you out.

Edit: clarification. You should start with a letter/email to founders requesting payment within a certain time frame, for example 2 weeks. After 2 weeks, send founders another email/letter requesting payment within 3 days and mentioning you will take further actions if not paid such as reporting to DOL and AG both in CA and NY as well as reaching out to advisers, investors and shareholders of the startups. After 3 days, start a letter/email campaign pleading for intervention by the advisers, investors and shareholders of startup mentioning you prefer not having to resort to legal and regulatory means and hope they can intervene to resolve the situation and it doesn't reflect nicely on them personally being associated with such startup and founders... blah blah blah. Wait a few days and then file complaint to DOL/AG mentioning the steps you took to resolve the issue, mention names of all people you contacted.

Don't believe everyone here saying, "You're screwed, you'll never see it." Screw that... $8k is a lot of money. Sue them in small claims court.

Generally if you have a legal claim under $10k, you can get your money back in small claims, without even hiring a lawyer. Gather up every piece of documentation, email/IM/SMS correspondence, proof of work, etc, and bring your case in front of a judge.

You'd be surprised how quickly some people can come up with money when they're staring down the barrel of a legal motion.

His debt will be with the corporation, so by the time he'd be ready to see a court room, the company would be gone. Suing a collapsing startup is a waste of time.

(The small claims limit in California against companies is $5k, FWIW).

As far as the debt being with the corporation, if a judge decides the founders acted negligently, s/he can "pierce the veil" of liability and hold them personally liable.

Good to know about the Cali small claims limit.

That's true of all torts, but not paying a consulting contract is very unlikely to be considered a tort; it's a contract dispute --- like, the archetypical contract dispute. The whole point of limited liability is that contract disputes end at the company.

While true that the corporate veil can be pierced in specific circumstances, it is not a common or a likely outcome especially for a contract dispute over an unpaid invoice.

Piercing the veil from my understanding requires you to prove that the primary shareholders fraudulently represented the company, e.g. didn't keep the books separate from their personal finances, commingled personal and business funds, took all the money out of the business to hide it willfully, didn't follow the incorporation documents etc.

I'm not sure how the small claims court in California works, but from my experience in Alberta, it would take multiple trips to SF to even get a court date (which may be months or years down the road). Even if you get a settlement you still have to collect it and if they declare bankruptcy, that is going to mean more court time and more money.

The $8k that the company owes to a consultant is likely to be way down on the list of things that suck that the founders of a failing startup are likely to be dealing with. On top of that, the unpaid consultant is in NY and the dispute resolution must take place in SF per the contract as described. If they were all in the same city, then the overhead of small claims is less. But the options for the consultant are flying cross country or hiring a local lawyer. That's good money after bad when pursuing actions against a corporation that has gone bust when the amount is a few thousand dollars.

You are probably out of luck. I had a similar "learning experience" years ago but mine cost me over $13K. Here are 2 things I do to mitigate the risk of this sort of thing:

(1) Never lend the client more than 2 weeks (80 hours) pay. Make payment due in 10 days with a step to a higher rate after that. I think for my next gig, I will spec the rate at the higher figure with a discount for paying within 10 days i.e. $200hr or $150hr if paid within 10 days.

(2) Draw up a client services contract. I scoured the internet and drew up a rough version of what I wanted along with a list of goals [example: "I don't want any liability"] and sent them to my lawyer to draw up a contracting agreement. I think it cost me $6-700. The beauty of this is that you can reuse it for multiple clients.

Lets see how this might have avoided your current situation. For one thing, you wouldn't have gotten to $8K outstanding before you stopped working. Your contract would also have specified that disagreements be settled in your home state. $5K is the limit for small claims in NY.

Actually, by your own standards he easily could have. 80 hours at even $100/hr is....$8k.

True. I almost never work 40 billable hours in a week at least not for the same client.

You might also look at offering 2/10 Net 30 terms. Which means if they pay within 10 days they get a 2% discount, otherwise they must pay the full amount at 30 days.

They're motivated to pay early to take advantage of the discount, and you're willing to only take 98% because money now is better than money later.

You need to make the incentive a lot bigger. Examples:

- If your rate is $150hr for 10 day net. 30 day net is $200 hour.

- If you are charging a $50K license fee if paid within 10 days, make it a $60K license fee if paid withing 30 days.

Client: "Oh, but I don't think we can turn that around in 10 days"

You: "I totally understand, I can work on retainer if that's easier."

Payment due on receipt of invoice is better. Nobody except an enterprise really needs ten days to cut a check. With established clients, just match your invoice to their AP cycle, e.g. if they write checks on the 15th and 30th, invoice on the 14th and 29th...ok so it's a day instead of immediately. Retainer payable against final invoice is even better, then you're never upside down. And why should you be if being upside down is unacceptable to the client?

It's a little late for you, but Mike Monteiro's "Fuck you, pay me!" talk has a lot of good information.

https://www.youtube.com/watch?v=jVkLVRt6c1U

Fuck you, pay me!

Those are magic words!

I was in a similar situation with a company I had previously worked for owing me around 2k for some side work I did after I left. I emailed the owner many times, and I eventually started ccing managers who had liked me. I never saw the money, and they went into bankruptcy restructuring shortly thereafter. When they were in bankruptcy I contacted their lawyer and the paper work he sent me implied I could only register debts incurred within the last 6 months and at this point I had been trying to get my money for a good year and a half. They've stayed open after the restructuring, but I don't think I can claim the money now, I'm not sure, I'm not a lawyer.

"YOU" contacted their lawyer. "YOUR LAWYER" should have contacted them or their lawyer.

I don't have lawyer money. I was doing the side work because I needed money.

You spent a year and a half trying to get your money back. A few hundred bucks to a lawyer is pretty small compared to that.

That said, small claims court is kind of made for stuff like this.

Most likely there is legal advice available for you for very little money. Ok, I am not in the US, but in Switserland you can have an 30 minutes of lawyer time for 50/100chf via local services. Similar things exist in the Netherlands. In the US, talk to one of the "ambulance" chasers, that is unlikely to cost you.

Legal options can cost a lot, but not for the first conversation. That first conversation is 90% of the value of a layer.

Without presuming too much, it could be that their situation is a lot more than -$8k. Your money is probably a lost cause, to be honest.

I know it sucks. My advice:

0. Don't take it personally. It's just business.

1. Be thankful it was only $8k. A lot of money when it's yours, not much in the big scheme of things.

2. Start requiring a retainer applied against final invoice. Clients who won't write you a check upfront, are less likely to develop the habit of writing you checks later.

3. Start stopping work when you are not paid promptly. The first people not to get paid are those for whom there is the least bang for the buck. Paying for something that is already in hand falls into that category.

4. Become more selective about clients. Prompt payment at high rates is all there is to a good client.

It's all part of the consulting landscape. One of the things I have come to believe is that people will red-flag their intent not to pay early on because it allows them to rationalize it via "I warned them" later on. To me, insisting that the disputes are settled at the payers convenience (in SF) rather than the consultant's is such a red-flag. Then again, once you contract with a corporate entity in a high risk business, you're accepting the idea that your payment can be easily avoided.

Good luck.

Call a lawyer. Sometimes a nasty letter from a lawyer is all you need to get someone to pay up.

If nothing else, use this as a lesson not to do more work for a company that already owes you from a previous invoice.

I've thought about that a lot - what do I take away from this?

I'm not sure there's anything I really could have done. I was working on 30 day terms (quite common), and I'd worked for them with quite prompt payment for over a year. I probably had ~12-15 paid invoices from them for similar amounts that were paid within 7-14 days of issue.

I stopped working for them upon the issuance of the second invoice in question - so I had two invoices outstanding at that point, 1 that was 15 days past issue (but not contractually due) and 1 just issued.

Do people in multi-invoice contracts really stop work until they have proof of remittance? I've never heard of such a thing - that sounds crazy to me.

If it's a company that's that small before taking work have their owners co-sign liability on your contracts.

So if their LLC(Whatever) fails, they're still on the hook.

Banks do this for every loan my small business has taken. You sign for your company, but you also sign personally. If they won't do this, move on.

Lesson learned.

That's a great lesson - thanks. I've never heard of or considered such a thing, but that's a great way to assure payment without raising prices.

EDIT: I think people aren't giving you enough credit here. Every contract is a negotiation - this clause is just another weapon I can include in my starting offer on a new contract. If people say hey, we won't agree to this provision, I can now say "OK, no problem, my rates just went up 10%."

No offense but I'd never sign a personal liability contract if I were contracting somebody even if I had millions sitting in the bank account. In my opinion that's just a silly idea, akin of asking a VC to sign a NDA.

If you try to do that I can see the company just telling you to go away. One of the reasons to become a LLC/LTD is so you don't have personal liability if the company goes under. It would be a bit stupid to sign that away when you can just hire someone else.

You don't stop work the moment somebody is an hour into arrears, but you do adjust your prices to accommodate the risk of non-payment.

Put it in your contract. "Work will stop on day 11 if payment is not received." This is why you (the contractor) draw up the contract instead of being at the whim of the client. This is not crazy, it's the clients choice if you stop working. It it's important that the project go forward they can talk to their accounts payable person. Otherwise they have little incentive to do anything. Instead of "You'll have to talk to accounts payable about that." it becomes, "Crap, my project is going to slip, I better walk over to accounts payable and get this straightened out."

No offense, but that sounds naive. Have you done any meaningful consulting work?

My experience was that the highest value clients paid somewhere in the net 45 to 90 range, despite contracts stating that we billed net 30 that included penalties and interest. And my experience was that it was actually fairly easy to increase prices by 25%, but extraordinarily difficult to get clients to agree to unusual terms (such as a halt in the performance of the contract in the case of minor payment delinquency).

I'm not saying my experience is the only experience, but frankly the only clients who I could imagine agreeing to those terms were puny, and unsophisticated folks who you probably don't want to work for anyway. The more sophisticated buyers all had a lawyer who would negotiate anything like that out of the contract anyway.

No offense taken. :-) I suspect that my part of the elephant just feels different than your part of the elephant.

https://en.wikipedia.org/wiki/Blind_men_and_an_elephant

Yes, I have consulted for everything from startups to large multinationals but your experience may be more common/normal/relevant for HN readers. With the most recent multinational client, it took some time for my contracts to go through legal but they approved everything without any changes.

Honestly, if you had that many paid invoices in the past, and the due invoices were not "contractually" due, there would have been no reason for you to get hostile or demand payments. In my opinion you did fine and it's just a case of unfortunate luck.

^ This

I know you edited your post saying you would't, but do NOT do anything to their codebase/website etc. Don't even remotely entertain the idea.

Similarly, don't spout anything libellous incase they end up going on the offensive.

Best thing you could do is pick up the phone and actually call them and give them a chance to respond (they're humans just like you) and if they dodge your calls, go for a debt collection service.

IANAL: If they're really going under then you probably aren't going to see a penny of that money. I would do what you can within reason. Make sure your claim is known if there are bankruptcy proceedings, but don't expect to be successful. $8k may be enough to be worth contacting a lawyer about.

If the company goes under, you're not getting your invoices paid.

You can get a nice chair or something though.

If they are truly going down and are a LLC or otherwise incorporated, there's probably not much you can do. Going forward, there are a few options:

- If you are doing project-based work with specific deliverables, delay delivery of the project until payment is received.

- Ask for a deposit from the client up front to cover such an eventuality. Depending on how much you want to cover your risk, this could be somewhere between 1/2 to a full month's worth of pay. To the client, if they ever want to terminate your consulting agreement, this becomes part of the last month's pay.

- Ask to be paid in advance for your work, stop working if payment isn't made in advance.

- Setup your consulting agreements so you are paid more frequently and stop working if you aren't paid when agreed. This limits the amount of money that could be owed to you.

If you are going to seek legal options for compensation in your current situation, you should try to do it before they shut down and still have assets. Of course you should consult a lawyer and get real legal advice from someone who knows the law before pursuing this option.

Sorry about your luck. Kiss it goodbye, and move on towards making up for the loss. Court is a waste plus will cost $$, and all you would likely get is a judgement (AKA a piece of paper) telling you what you already know. Then it's still your job to collect that money even w/ the judgement. 8k is def a nice chunk of change, thought at least it wasn't 80k. One positive thing is you can report this as a loss for your business which should help w/ your 2015 taxes.

Then theres always taskrabbiting a ninja in the bay area to help you collect ;) Good Luck

You find another client. This one is not going to pay you, and a bankrupt company will, in the very best scenario, give you a few pennies on the dollar, a long long time from now.

I had a similar experience. What saved the day was reaching out personally and relying on that personal relationship. The founder made sure we got paid as the business reorganized even though it took a while and was nerve-wracking for us. It took extra effort on the founder's part but he came through for us. Have you tried calling and speaking to the head there or whomever you had the strongest relationship with?

If you are ultimately unable to collect. You can send them and the IRS a 1099, at year end. They will end up owing the IRS taxes for your work performed, but not paid. Something my CPA does for clients she can't collect from.

Not a solution for you, but a headache for them.

Small claims is possible as well. Just file two claims, one for each invoice.

Have a read of this info here which might be useful to you ...

http://www.shrm.org/templatestools/hrqa/pages/wagesandbankru...

Divide the loss by the gain and call it cost of doing business. Do what you have to do and move on. Maybe next time don't advertise your intentions before getting paid?

What concerns me the most is that you just had to mention access to code AND that you had not touched it.

My suggestion would be to agree to some sort of compromise. Tell them you'll take computer hardware or less money in exchange for debts settled. Do it soon before everyone else does it and there's nothing left.

This lawyer will take care of it on your behalf and will only take a cut if they are successful: http://justtelljulie.com

The word lawyer does not appear on that site, and I am pretty sure she's not a lawyer.

It looks like she's an awesome AR clerk -- but her value prop is collecting while keeping a very good relationship -- it's not as effective when the customer has no ability to pay and you don't want to work for them any more.

Email them again, include the URL to this page.

Name them in 24 hrs when they don't reply (don't threaten them with that, just do it)

While this is advice after the fact, anybody doing contracting should spend 30 minutes and watch this video.

It's a presentation from Mike Monteiro who's the co-founder of Mule Design Studios.

https://vimeo.com/22053820 -- "F*ck You. Pay Me."

Wonder why people place so much trust and value just because two guys with a one trick pony got into YC.

I just love hearing "We are a YC backed startup". First thing they tell me. Okay? You want a cookie now? What the hell? It's fucking meaningless, it actually tells me you don't know what you are doing, and that I should be divesting.

At the end of the day, if it's still a one trick pony, add any two random capital LETTERS, still won't save a startup, because it can fail for so many reason.

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