A bootstrapped startup is a business focused on a rapid growth strategy, specifically without receiving external funding. It may seem counter-intuitive that bootstrapping may better serve your business’ interests than having a larger amount of capital from external sources. However, there are both risks and opportunities available to those willing to back themselves and self-fund. This article will explore those challenges and opportunities, and offer guidance on how to overcome the difficulties that bootstrapped startups often face.
Bootstrapped startups are known for having a restricted budget. They are also known for being frugal with the funding they have available to grow their business. They may also provide in-kind services or products, offered in exchange for another kind of asset such as a substitute for paying in cash.
A bootstrapped startup may, for example, be running on the savings of their founders. It may also leverage an asset – like the founder’s home – to pull out cash using a redraw facility. There are potentially significant personal risks in using your personal funds to support a startup.
Challenges and Opportunities for Bootstrapped Startups
A tighter operational budget
Your plans may need to change according to your budget. This may mean putting a hold on taking out a lease. It may also mean holding off on additional products and services and anything else not essential to your growth plans.
Retaining control of your company
You and any other founders can make quick and impactful decisions without having to consult investors. Investors may have voting rights on particular issues, or a board seat.
Attracting and retaining talent
You want the best talent working for your business. Unfortunately, it can be difficult to compete on salary and perks when you are bootstrapping.
Developing creativity and innovation
Budget constraints may hone your adaptability and help you and your team to stay nimble. This resourcefulness will put you in good stead as you grow.
You risk losing your personal savings or putting an asset at risk if you are leveraging it or otherwise using it as security.
Fully backing your vision and team
Self-funding is putting your money where your mouth is. It demonstrates to others (and yourself) your full commitment.
While your budget may be tighter as a bootstrapped startup, there are ways to overcome the challenges of attracting and retaining talent and mitigating your personal risk:
1. Offer Shares to Employees
It is common for startups to sweeten a below-market or average salary with an offer of buying into the company. This is in order to attract and retain top talent. An employee share scheme (ESS) or employee share option plan (ESOP) allow you to offer your employees either shares or options. Options give an employee the right to purchase shares at a later time. If your employees own a percentage of your startup (or the option to purchase shares), you incentivise them to ensure your startup does well.
An ESS or ESOP may also assist with your staff retention rates if the shares or options issued are subject to vesting conditions. Vesting conditions on shares or options mean that although ownership of the shares or options is given immediately, irrevocable ownership is earned over time. If you issue an employee with their shares or options and they do not meet the vesting conditions, they may lose ownership of all or part of their shares or options. Vesting conditions may also relate to tailored key performance indicators.
Tax Concessions on ESS/ESOPs
There can be tax concessions for companies implementing an ESS or ESOP. From 2015, the Australian Taxation Office introduced tax concessions for eligible startup companies offering eligible ESS or ESOPs. These tax reforms have resulted in companies offering an ESS or ESOP only being required to pay tax on a share or option when it receives a financial benefit (at the point that a sale occurs). Companies used to have to pay tax at the point they received the shares or options, exercised the options and also when they later sold the shares or options.
You should seek specialist tax advice on the eligibility of your company for tax concessions and how best to structure either an ESS or ESOP for your company.
2. Assess Your Personal Circumstances
It may be risky to use your personal funds or leverage your personal assets (like your home or investment property) to run your startup. For this reason, you should obtain tax planning and structuring advice to determine if you could better mitigate your risk. For example, you may wish to hold valuable assets such as a home or investment property through a discretionary trust, rather than in your personal name.
A discretionary trust is not a separate legal entity like a company. A discretionary trust is a legal relationship that describes when assets are held for a particular purpose. A trust relationship is when one party (the trustee) holds assets for the benefit of one or more other parties (beneficiaries). The trustee administers those assets in accordance with the purpose of the trust. When your assets are held by a trust, they are not held by you personally. In the eyes of the law, the trustee holds those assets on behalf (or as trustee for) the discretionary trust.
A discretionary trust may offer you substantially better asset protection from creditors in the event that your startup was unable to pay debts. This is because the assets are held or owned by the trustee on behalf of the trust, rather than them simply being held in your personal name.
Bootstrapping Success Stories in Australia
While bootstrapping founders can face various challenges in scaling up, it is not necessarily an obstacle to making it big. Here are two examples of Australian startups who have scaled up significantly without taking on external investment:
Online fashion retailer, Showpo, sells modestly-priced clothing, shoes, accessories and beauty products to young women looking for the latest trends delivered quickly.
Jane Lu started Showpo in 2010 and it has remained self-funded up to now. It had a reported revenue of $32 million in 2017.
Another online fashion retailer, Stylerunner, offers a curated range of activewear brands. Julie Stevanja launched Stylerunner in 2012 and has remained self-funded. Stylerunner had an estimated revenue of $30 million in 2017.
Bootstrapping refers to startup founders using their own funds and assets. You should be aware that bootstrapping does not cap your business’ potential. There are some advantages to bootstrapping, including:
- retaining control of your business;
- developing an innovative outlook; and
- fully backing your vision and team.
However, there are also challenges to self-funding, including:
- a potentially tight operational budget;
- attracting and retaining talented employees; and
- mitigating your personal risks.
Bootstrapping can be a challenging task in a startup, when finances are so important. If you have any questions or need assistance with structuring your bootstrapped startup, get in touch with LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.
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