I was advising a bootstrapped startup for two years. The startup was at zero revenue when we started working together. They recently got to break even.
The future looked really bright for the company.
Then the wheels started falling off.
The company had a really solid plan to continue growing revenue, increase profitability, and increase the founder’s salary to a living wage and beyond. Everything looked great.
Revenue kept going up and profitability kept getting better. Then the founder made a critical mistake.
The founder had taken out a second mortgage on his home. He used the money from this mortgage to finance the company. In return, he received equity in the company.
He decided that he needed to pay down his second mortgage. Again, there’s nothing wrong with this.
I asked the founder how he was planning on paying down his mortgage and he said with the loan he gave the company and his salary. There was only one small problem with his plan:
There was no loan on the books.
Paying back his “loan”created two problems for the founder:
- He was draining the company of the capital needed to fund growth. So the company’s growth stalled, and, more importantly…
- You can’t just make up a loan. The books have to match. Period.
That was it for us working together. Integrity is an interesting thing. You can’t just turn it on when you decide. You either have integrity or you don’t.
I asked the founder why he was taking this route. His answer was, “I’m panicked about the mortgage.”
The sad thing is the founder would have paid off the same amount of his mortgage AND the company would have grown faster if he hadn’t panicked.