Ask HN: Living off F&F round while I start up the startup. What to tell EDD?

2 points by msallin 11 years ago | 2 comments

I'm working full time on my startup. I've raised some Friends & Family money but I want to use it on building the company, not paying my rent. I applied for Unemployment and they scheduled an interview with me. What do I tell them, if anything? It seems the Employment Development Dept doesn't take "starting up a start up" into account.

anigbrowl 11 years ago |

Technically you're self-employed, just not profitable. You should pay yourself a salary or else you're basically asking the government to subsidize your startup for free. As a pragmatic matter you could just lie about looking for paid employment and you'll probably get away with it, but if you do get caught then they'd throw the book at you.

A start-up is not different from hanging out your shingle in any other self-employment capacity, except insofar as you have the potential to make much more money in a relatively short space of time if you get lucky. It doesn't exempt you from your legal obligations. Indeed now that I think about it another reason you should be paying yourself a salary is that otherwise it's going to be hard to disentangle your personal expenses from those of the business for tax purposes later on, and you might wind up paying more in legal/accounting fees than you think you are saving.

smt88 11 years ago |

You can't get unemployment benefits without breaking the law. That's the bottom line. The consequences for defrauding the government this way are pretty serious.

Also, you can't use that money to pay your rent directly. You need to pay yourself through your company. If you don't, you're "piercing the veil" of the corporation, meaning that you are blurring the lines between your LLC and yourself. That means you lose your limited liability, and anyone who sues you can come after you directly in court (instead of just your company).

Unfortunately, starting a company requires capital. Most companies become cash-flow positive (if they ever do) 18+ months after starting. If you can't live off of what you've saved or what you raise for that amount of time, starting a company isn't for you.

That's the unfortunate thing about startups. Not everyone can pursue them. It's not a god-given right. You need to be lucky enough to have a substantial safety net or, otherwise, the ability to save lots of money beforehand.